Backdating documents
葛安德 Andrew Godwin

In a previous column, we considered the concept of a transfer or assignment of contractual rights, under which one of the parties to a contract assigns its rights to a third party. This concept is recognised in common law jurisdictions and also in China (see China Business Law Journal volume 3 issue 7, page 132: Transfer or assign?). This column discusses about contract law basics and considers whether it is possible to transfer the obligations under a contact and, if so, the legal mechanics in common law jurisdictions, civil law jurisdictions, and in China.

There are many circumstances in which this question may be relevant. For example, if the owner of a business sells the business to a third party purchaser and the structure takes the form of a sale of assets instead of the sale of shares, the assets may include rights under contracts. Instead of the other parties to those contracts continuing to perform their obligations in favour of the former owner, the purchaser may want them to perform their obligations directly in favour of the purchaser. Another example is where a bank wishes to sell a loan to another bank and the new bank agrees to take over any of the obligations of the old bank under the loan agreement (e.g. the obligation to continue to lend amounts to the borrower). A third example is where contracts on the financial markets (e.g. the futures market) are cleared through a central clearing system, which steps in between the buyers and the sellers and guarantees performance of the obligations under the contracts.

Position in common law and civil law jurisdictions

In common law jurisdictions, like England and Hong Kong, it is not possible conceptually to transfer or assign contractual obligations from one party to another party. Only contractual rights are capable of being assigned. If contractual obligations are to be undertaken by a new party, it is necessary to replace the existing contract with a new contract through a process that is called “novation”. The term novation is derived from the Latin word novare, meaning “to make new” or “renew”.

The best way to understand novation is to consider an example. Let’s say that Party A and Party B are parties to an existing contract. Party A wishes to withdraw from the contract and substitute a third party, Party C, in its place. Under the arrangement, Party C will enjoy the rights that Party A previously enjoyed and will also take over or assume the obligations that Party A previously owed to Party B. In order to make the arrangement effective, Parties A, B and C will all have to agree to the following:

  • Party B will discharge Party A from its obligations under the contract;
  • Party A will discharge Party B from its obligations under the contract;
  • Party B will continue to perform its obligations to Party C and will continue to be bound by all of the terms and conditions of the original contract in the same way as if Party C had been a party to the original contract in place of Party A; and
  • Party C will perform the obligations of Party A and will be bound by all of the terms and conditions of the original contract in the same way as if it had been a party to the original contract in place of Party A.

Under the above arrangement, the original contract between Party A and Party B is replaced with a new contract between Party B and Party C. The new contract is generally on exactly the same terms as the original contract. However, because a new contract comes into place, it is possible for Party B and Party C to agree to amend the terms.

In some novation agreements, Party A and Party B continue to be liable to each other for any claims or demands that relate to matters arising before the date on which the novation became effective. In other novation agreements, Party A will be released from all of its liabilities and Party C will assume all of the liabilities that have arisen from the date on which the original contract was signed.

As is the case with all contracts, a novation agreement will require consideration from each of the parties in order to be valid and effective. In general, the agreement of each party to discharge the existing contract and to replace it with the new contract will be sufficient consideration. However, it is common for the parties to agree to sign a deed of novation to avoid any risk that one of the parties later argues that the novation is not valid as a result of the lack of consideration (for an analysis of the concept of consideration in common law jurisdictions, see China Business Law Journal volume 5 issue 1, page 117: Consideration).

Interestingly, there is a difference between the approach adopted in the common law jurisdictions described above and the approach adopted under New York law. Although a novation would be recognised under New York law, New York law also recognises the concept of delegation, under which obligations may be transferred with the agreement of the three parties. Like novation, this involves the release of Party A from its obligations under the contract. However, unlike novation, it does not result in the replacement of the existing contract with a new contract. This offers some advantages over novation. For example, if a bank wants to transfer its rights and obligations to another bank as part of a loan sale, the transaction does not have any impact on the security that the borrower provided in respect of its obligations under the existing loan agreement.

Civil law jurisdictions also recognise the concept of delegation, which can take place either on a perfect or an imperfect basis. Under a perfect delegation, the party delegating the obligations is released completely from its obligations and it is only the party to whom the obligations are delegated that becomes liable for the performance of the obligations. Under an imperfect delegation, the party delegating the obligations remains liable for the performance of the obligations, together with the party to whom the obligations are delegated.

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葛安德 Andrew Godwin
Andrew Godwin

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at