Assignment and Novation of Contracts
Assignment and Novation of Contracts
This article describes the legal framework and relevant considerations under Cyprus Law regarding the assignment of contractual rights and the novation of contracts. It analyses, inter alia, the difference between the two concepts, the legal basis and the historical development of the assignment of a contractual right, the relevant legal and practical considerations and issues of enforceability.
Assignment vs Novation
An assignment of contract is where one party of a contract, known as the assignor grants or transfers the contract's rights and benefits to a third party, known as the assignee.
On the other hand, a novation of a contract refers to the act of replacing a party of an existing contract by introducing a new party to the contract, which new party voluntarily adopts the liabilities and obligations of the original party of the contract, together with the benefits. The original party is, depending on the terms of the novation, released from any future obligations.
In the context of an assignment the "grantor" or "assignor", may, depending on the terms of the original agreement act unilaterally in grating the rights or benefits to a third party however in the context of a novation of an agreement all three parties have to expressly consent in writing, namely the continuing party, the outgoing party and the incoming party.
It should be emphasized that the assignment of obligations under an agreement is not permissible under any circumstances under Cyprus Law (and thus this can only be achieved by way of a novation).
Requirements of Novation
A written law serves to the purpose of novation by virtue of s. 62 of Contract Law Cap.149 which states that ' if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed'.
Novation can also be effected by the parties' conduct. However, in such occasions it must be proved that the variation of the original contract was intended and understood by all parties involved (Cyprus Agriculture & Transport Co Ltd v Attorney General (1971) 1 CLR 267).Further, it requires the consent of the original two contracting parties as well as the new party. Consideration must be provided for this new contract unless the novation is documented in a deed signed by all three parties.
It should be noted that novation does not cancel past rights and obligations under the original contract unless the parties involved explicitly and mutually agree to novate them.
For more information on Novation Agreements see Template: Novation Agreement ( Generic).
Development of the legal right of Assignment
As a common law country, Cyprus adheres to the principles of Equity as these have originally been interpreted by the English Courts and thereafter have been implemented into the national legal order. Historically, the original position of common law was that a chose in action cannot be assigned to a third party as it was considered as exclusive ownership of the original beneficiary.
Thus, any legal right or action at law would be a privilege belonging only of the original beneficiary. However, this rigorous approach was abandoned in the 17th century as it was not compatible with the new commercial reality (P.Polyviou, Contract law in Cyprus: Theory and Practice 2017).
Gradually, the English courts interpreted assignment as an agreement that binds the chose in action by applying equity law and focused on examining the intention of the assignor as to whether it was absolute and clear in regards to the assignment. Eventually, assignment was also introduced into the legal order of England by way of section 136 (1) of the Law of Property Act 1925. The principles of Equity and section 136 (1) co-exist, as one of each may be applied in such context.
The Right of Assignment in Equity
In Cyprus Law there is no express provision to be found in Contract Law Cap.149 that sets out the legal requirements to be satisfied for an assignment of rights in a contract. However, Equity law and its interpretation by the Cypriot courts have provided guidance on the matter by introducing certain requirements and considerations:
- Legal right in action
The Cypriot courts re-affirmed that a legal chose in action is capable of being the subject of equitable assignment in the case of Chrysostomou v Chalkousi & Sons (1978) 1 C.L.R. 10 where it was held that the assignee can autonomously claim an action in law for defending his rights.
- The assignment of the legal chose in action must be absolute
In determining whether such assignment is absolute, the principles of equity will look at the intention of assignor and the assignee, rather than the wording of any document involved (Vassos Ayiomamitis Developments Ltd. V Artemi Thomaidi [2000] 1A AAD 238). The intention of the parties must be clear from the contract for the assignment between the assignor and the assignee which should clearly and unequivocally intent for the full and final assignment of the legal chose from the one party to the other.
- An assignment is not considered as an agent relationship
The Cypriot courts have placed distinction between the two in the case of Vassos Ayiomamitis Developments Ltd. V Artemi Thomaidi [2000] 1A AAD 238. If the intention of assignment is not clearly drafted in the assignment agreement, then such relationship between the parties shall be construed as an agent- representative relationship.
- Consideration is not a requirement
Consideration is not a necessity in this context under the condition that such assignment is completed, which means that the assignment has taken place. If only a promise of the assignment exists, then such assignment is not considered as completed (P.Polyviou, Contract law in Cyprus: Theory and Practice 2017).
- Notice to the debtor is not necessary
As the principles of Equity apply, written notice is not necessary under Cyprus Law in contrast with English Law where written notice for the equitable assignment is required. However, even if not required, the English courts have on occasions emphasized that such notice may operate as evidence of the intention and understanding of the parties (Rodick v. Gandell 42ER 749). Exemptions apply in where a debtor must be notified in order for the assignment to be rendered legal as follows:
-where the debtor has no knowledge of the assignment and thus proceeds with payment to the assignor. In such occasion the assignor will be bound to proceed with the payment of the amounts to the assignee.
-where there the first assignment from the original party to another is followed by a second assignment from the original party with another party. The second assignment has priority over the first assignment provided that the debtor was notified for the second assignment, but he had no knowledge for the first assignment.
- Charges over a chose in action
It is a common law principle that the assignee will undertake all charges that come with the chose in action at the time of the assignment. This principle is based on the fact that any burdens that are claimed from the assignee can also be claimed in turn by the assignee from the assignor. The matter may also be governed between the assignor and the assignee in the relevant agreement by introducing clauses that
For more information on an assignment agreement see Template: Assignment Agreement.
Locus Standi
The Assignee may file an action in his name and claim his rights under the assignment as was held in the case of Attorney General of the Republic of Cyprus v Christopoulou (1994) 1 AAD 479) as he becomes the owner of the legal chose and is therefore entitled to enforce a contract and sue for the recovery of that chose against the other contracting party regardless of the assignor's consent; although it is good practice to seek such consent. In case the assignor refuses to give his consent to the action, the assignee may submit an application to the Court in order to authorize the assignor's consent.
In a similar manner, the assignor is not entitled to file any action in regards to the assigned rights in the absence of the assignee, as such legal rights belong to the assignee and only (Three Rivers D.C v. Bank of England [1995] 4 All E.R 312). If the assignor wishes for any reason to become part of the proceedings, then the Court will request that he joins the assignee as a party in the relevant proceedings. It is noted that the assignor may sue as trustee for the assignee, provided the assignee so requires (Three Rivers D.C. v Bank of England [1995] 4 All E.R. 312).
Rights that cannot be assigned
Personal contracts, and any relevant rights of such, cannot be assigned due to their nature. Such contracts entail a personal capacity and relationship between the original parties, which renders them not assignable. Examples of these contracts are the insurance contracts which predispose a special relationship between the insurance company and the insured person due to the research and knowledge of the insurer before the drafting of the agreement.
Author
Eleni Miltiadous of Varnavas Playbell & Co. LLC
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