Assignment, Novation or Covenant? The Contract Distinction That Quietly Causes The Most Confusion
When contracts need to change - because a business restructures, a project moves from construction to operations, or a new operator steps in - the question we’re most often asked is:
“Can’t we just assign the contract?”
Sometimes yes. Often no.
And occasionally, what you really need isn’t an assignment at all.
Understanding the difference between assignment, novation, and deeds of covenant can save time, cost, and serious risk - particularly in long-term, operational or regulated arrangements.
Assignment: Moving Benefits, Not Responsibilities
An assignment transfers rights only under a contract - typically the right to receive money or services.
What it does not do:
transfer obligations
release the original party from liability; or
replace a party to the contract
When Assignment Works
Assignments are most suitable where:
only benefits are changing hands (e.g. receivables, payment rights); and
the original party will continue to perform the contract
Example:
A supplier assigns its right to receive payment to a financier, but still performs the services itself.
Common Trap:
Parties often assume assignment “moves the contract”. It doesn’t. The original party usually remains legally responsible unless the counterparty agrees otherwise.
Novation: Replacing A Party Entirely
A novation replaces one party to a contract with another.
It transfers:
rights and obligations, and
releases the outgoing party from future liability
Legally, the original contract is extinguished and replaced with a new one (on substantially the same terms).
When Novation Is Required
Novation is the correct approach where:
a new legal entity is taking over performance
the outgoing party is exiting entirely; or
operational responsibility has shifted (for example, from a construction contractor to a permanent operator).
Example:
A builder exits at Practical Completion and a facilities operator steps in under an ongoing energy or services agreement.
This is common in:
infrastructure and utilities;
PPPs and major projects;
long-term supply, services, or operational contracts.
Deeds of Covenant: Adding Obligations, Not Transferring Contracts
A Deed of Covenant doesn’t transfer a contract at all.
Instead, it:
creates direct obligations between a new party and an existing counterparty; and
sits alongside the original contract
It’s often used to:
bind an incoming party to compliance obligations;
provide direct enforceability where there’s a privity gap; or
supplement an assignment with additional protections.
What A Covenant Does Not Do
It does not release the original party
It does not substitute a contracting party
It does not cleanly deal with succession or exit on its own
Example:
An incoming operator covenants to comply with safety, compliance and reporting obligations, while the original contracting party technically remains on the contract.
Why This Distinction Matters (More Than People Think)
Choosing the wrong mechanism can mean:
the “old” party remains legally liable when everyone assumed they were out;
the “new” party isn’t actually bound to perform;
enforcement becomes unclear; or
contracts don’t reflect the operational reality on the ground.
This can create real governance and compliance risk - not just legal theory problems.
The Takeaway
If a contract change involves:
a new legal entity,
ongoing performance, or
operational responsibility,
then an assignment alone is rarely enough - and a covenant is usually only part of the picture.
Getting this right upfront avoids rework, renegotiation, and awkward conversations later when something goes wrong.
If you’re dealing with a restructure, project handover or “change of customer” request and aren’t sure which mechanism applies, our Commercial team regularly helps clients navigate this - pragmatically and without overcomplicating it. Reach out via [email protected].