Australia: Assignment & novation clauses in commercial contracts

Drafting key clauses in commercial contracts - Part 2
Last Updated: 3 July 2014
Article by Paul Kordic
This article is part of a series: Click Recitals, definitions & interpretation clauses in commercial contracts for the previous article.

3.1 Assignment

An assignment clause usually allows a transfer of rights, benefits and obligations under a contract from one party to another.

A party will usually wish to ensure that it continues to deal with the party it originally contracts with. There may even be an option of terminating the contract in the event of an attempt at substituting the other party or in the event of a change of control in the other entity.

It is often desirable to have a process to have the final right of approval of any change in the other party.

In contractual relationships, where one of the parties has the "upper hand" over the other 5 assignment clauses can often operate unilaterally preventing the lessee from assigning.

Some documents may expressly permit the chosen party to assign its interest at will and without the necessity of requiring the weaker party's approval 6 (eg winery in a grape purchase contract).

A change of control clause should also be considered. Such a clause governs the situation where there is a change in the ownership or control of a party to the contract.

It should define the events constituting a change of control. It will provide that any change of control (that falls within such definition) will:

  • Trigger a certain set of events such as termination; or
  • May be deemed to be an assignment. Such a deeming provision will then trigger the same information and approval processes necessary in an assignment situation.

3.2 Novation

Novation is a method of releasing a party from the contract and introducing a new one in his or her place.

Novation differs from assignment in that novation requires the consent of all the parties to the existing contract.

The new contract may be between the parties to the existing contract only or new parties may be substituted.

The consideration for the new contract is the mutual discharge by the parties of the obligations under the old contract.

3.3 Extract of assignment clause from standard deed

6.7 Assignment

[Alternative 1 – General Assignment Clause]

  1. Rights arising out of or under this deed are not assignable by one party without the prior written consent of the other party.
  2. A party must not unreasonably withhold its consent./ A party may withhold consent in its absolute discretion.
  3. A breach of clause 6.7(a) by one party entitles the other party to terminate this deed.
  4. Clause 6.7(c) does not affect the construction of any other part of this deed.

[Alternative 2 – Assignment clause that binds one party only]

Party 1 may assign its rights under this deed and each Collateral Security without the consent of Party 2.

[Alternative 3 – Assignment prohibited]

[/] The rights created by this deed are personal to the parties and must not be dealt with at law or in equity.

3.4 Extract of assignment clause from standard lease

6 Assignment and Subletting

6.1 No interest to be created without consent

Subject to clause 6.2, the Lessee is not to assign this Lease or create in favour of any person an interest in this Lease or the Premises, or allow any person to use or occupy the Premises, without the Lessor's consent.

6.2 Requirements for assignment of subletting

The Lessee may assign the Lease and the whole of the Premises or sublet a part or the whole of the Premises if:

  1. at least 14 days before the date of the proposed change in the occupation of the Premises, the Lessee:
    1. applies for the Lessor's consent; and
    2. supplies to the Lessor evidence acceptable to the Lessor that the proposed assignee or sub-Lessee is experienced in and of good reputation in relation to conducting a business permitted by this Lease, and is financially able to conduct that business; and the Lessor consents to the assignment or sublease;
  1. The Lessee delivers to the Lessor, before the date of the proposed change in occupation, a completed agreement (or deed), in a form prepared or approved by the Lessor's solicitors, by which:
    1. the proposed assignee or sub-lessee agrees with the Lessor to be bound by this Lease as from the date that the assignment or sublease takes effect; and
    2. any guarantor required under this clause gives to the Lessor a guarantee and indemnity in the terms of that clause in respect of the liability of the assignee or sub-lessee;
  1. the Lessee has remedied any outstanding default on the Lessee's part or the Lessor has waived the default;
  2. the Lessee pays to the Lessor on demand the Lessor's expenses, including legal costs,
    1. incurred in making enquiries to satisfy itself concerning the matters specified in clause 6.2(a)(ii); and
    2. in connection with the preparation, completion and stamping of the assignment or sublease and any other related documents, and the stamp duty on all those documents;
  1. if requested by the Lessor, the Lessee arranges for the proposed assignee or sub-lessee to obtain from a bank or other person acceptable to the Lessor a guarantee of the obligations under this Lease to be assumed by the proposed assignee or sub-lessee;
  2. in the case of an assignment, the Lessee has withdrawn any caveat lodged by it in respect of its interest in the Premises; and
  3. nothing in this clause 6.2 affects an assignment to a company which has similar underlying ownership to the Lessee if the parties comply with clause 6.2(b).

6.3 Lessee remains liable

The Lessee remains fully liable under this Lease if the Lessee assigns this Lease or creates an interest in this Lease or the Premises in favour of any other person, whether or not the Lessee has complied with the requirements set out in clause 6.2.

6.4 Change in control

If the Lessee is a company, and there is a change in control of the Lessee (or if the Lessee is a subsidiary, any change in the control of its holding company):

  1. the change in control is to be taken to be an assignment of the Lessee's interest in the Lease; and
  2. if requested by the Lessor, the Lessee is to obtain from a bank or other person acceptable to the Lessor, a guarantee of the Lessee's obligations under this Lease on terms acceptable to the Lessor. The Lessee shall be deemed to have complied with this clause 6.4(b) by provision of a guarantee by the directors of the Lessee;
  3. and in this clause 6.4:

    1. "control" means control of the composition of the board of directors or control of more than 50% of the shares with the right to vote at general meetings; and
    2. words defined in the Corporations Act have the meanings given to them by that Act.

6.5 Exclusion of statutory provisions

The provisions of sections 80 and 82 of the PLA do not apply to this Lease.

6.6 Costs and expenses

The Lessee is to pay to the Lessor on demand all fees and expenses payable by the Lessor to any agent or consultant engaged by the Lessor in connection with a proposed assignment or sub-letting.

4. Entire Agreement

The effect of an entire agreement clause is to prevent the parties relying upon any discussions, statements, understandings or other documents that are not expressly embodied or contained in the contract.

The effect of the clause is to make the contract a single 'stand alone' document containing the whole of the agreement of the parties.

Its purpose is to prevent the parties claiming subsequently that the contract does not accurately reflect the agreement reached or the understanding of the parties.

All successive drafts and versions of a contract (particularly the final one to be signed) should be checked to ensure that there are no terms not previously discussed or negotiated.

The effectiveness of entire agreement clauses will ultimately depend upon the parties' approach and conduct in the negotiation of the contract and its terms. In order to be totally confident in relying on the clause, compliance will usually be required with the applicable laws and requirements relating to:

  • Unconscionable conduct;
  • Misleading and deceptive conduct; and
  • False and misleading representations.

4.1 Extract of entire agreement clause from standard business sale agreement

22.12 Entire Agreement
  1. This agreement supersedes all previous agreements in respect of its subject matter and embodies the entire agreement between the parties.
  2. The Buyer acknowledges that no representations, warranties, promises, undertakings or agreements have been made by the Seller or any Related Corporation or any person acting, or purporting to act, on behalf of the Seller or a Related Corporation in connection with the sale of the Business or the Business Assets other than as expressly set out or referred to in this agreement [or a Related Agreement].
  3. The Buyer acknowledges that it has not relied on any statement, representation, warranty, promise, undertaking or agreement (whether express or implied, oral or written) resulting from or implied by conduct made in the course of communications or negotiations in connection with the sale of the Business or the Business Assets, which is not set out in this agreement [or a Related Agreement].
  4. [Seller addition] Nothing in this clause 22.12 will exclude any liability which the Vendor would otherwise have to the Purchaser in respect of false, misleading or fraudulent statements made by the Vendor prior to the date of this Agreement.

4.2 Extract of no reliance or inducement clause from AMPLA Joint Venture Agreement

22.8 No reliance or inducement

Each party warrants and agrees that when entering into this agreement it relied exclusively on the following matters independently or any statements, inducements or representations made by or on behalf of any other party (including without limitation by the officers, employees or agents or any other person acting on behalf of a party):

  1. its own inspections, investigations, skill and judgement;
  2. the terms expressly contained in this agreement; and
  3. opinions and advice obtained independently of any other party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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This article is part of a series: Click Recitals, definitions & interpretation clauses in commercial contracts for the previous article.
This article is part of a series: Click Mediation and arbitation clauses in commercial contracts for the next article.
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