There are many reasons you may wish to transfer an existing contract to another entity. The most common situation we see is that you might start providing services in your individual name, and then choose to set up a company. We have written about the benefits of running your business through a company here. Transferring contracts might also be necessary if you have bought a business by way of an asset purchase transaction and want to make sure you keep any important contracts.
How do I transfer a contract to a new entity?
Contracts typically confer burdens (obligations) and benefits on the parties involved. For example, a contract obliges service provider A to provide certain services to customer B and confers the benefit on A of the right to receive payments from B. The same contract gives customer B the benefit of receiving the services from A and the obligation to pay A for them.
There are several ways to transfer contractual rights and obligations, but only one of these allows for a full transfer of both the benefit and the burden of a contract.
Assignment
Assignment allows the parties to transfer only the benefit of a contract. In the above example, this would mean that service provider A could assign its right to be paid to a different party, for example to a company it owns, company C. In the event of non-payment, company A would have the right to sue customer B for the debt. Equally, customer B could assign its right to receive the services to a third party, such as a subsidiary company, but this would not affect the obligation of customer B to pay for the services.
Subcontracting
Another option is for a party to subcontract the performance of its obligations to another party. For example, service provider A could delegate the provision of certain services to service provider D. However, this does not affect service provider A’s liability under the original contract; if service provider D fails to provide the services to customer B, service provider A will remain liable.
Novation
Novation is the only form of transfer that allows for a full transfer of the contract, including both its benefits and burdens. Novation is done by way of an agreement in which a third party takes on the rights and obligations of the original parties. This would be the best way for service provider A to transfer the contract to company C, essentially creating a new contract between customer B and company C, at which point service provider A is no longer liable under the original contract.
For a novation to be valid, all the original parties and the incoming party must consent to the novation (this is not the case with assignment). If you are planning to set up a company and want to make sure you can transfer existing contracts to that company, it is advisable to include a clause in those contracts allowing for future novation. It was established in the cases of Habibsons Bank Ltd v Standard Chartered Bank (Hong Kong) Bank Ltd [2010] EWCA Civ 1335 and Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2537 (TCC) that a continuing party can validly consent to a novation in advance and this can be contained within the original contract, so long as the terms of the new contract are sufficiently clear and certain.
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