If your company wants another company to take over a business contract in Singapore, the first question is whether you are transferring only the benefits or the whole contract. Rights, such as the right to be paid, can usually be assigned without the other party’s agreement unless the contract says otherwise. Obligations cannot. To move the duty to perform, and to release the original party, you need a novation: a new three-party agreement signed by the outgoing company, the incoming company and the counterparty. Getting this wrong can leave the original company liable for a contract it thought it had handed over.
What is the difference between assignment and novation?
An assignment transfers a right that one party has under a contract to someone else. The classic example is the right to receive payment. The assignor (the company transferring the right) drops out of that right, the assignee (the new company) can enforce it, but the contract itself stays between the original parties. The assignor still owes any obligations it had.
A novation replaces the contract. The old contract between Company A and the counterparty is discharged, and a new contract on the same or similar terms comes into existence between Company B and the counterparty. Because a new contract is being made, everyone involved must agree, including the counterparty.
In everyday business language people say “assign the contract” when they really mean “novate it”. Lawyers and counterparties will read the document you sign according to its legal effect, not its label, so it is worth being precise from the start.
Can a company assign its obligations under a contract?
As a general rule of contract law, no. You can transfer the benefit of a contract but not the burden. A customer who agreed to buy services from your company is entitled to look to your company for performance, and it cannot be forced to accept a different company in your place.
What a company can often do is arrange for someone else to carry out the work, for example by subcontracting, if the contract permits it and the work is not personal in nature. That is not a transfer of the obligation. If the subcontractor performs badly, the counterparty still sues the original company. Only a novation moves the obligation and the liability to the new company.
What makes an assignment a legal assignment under the Civil Law Act?
Singapore has two kinds of assignment. A legal (statutory) assignment under section 4(8) of the Civil Law Act 1909 must meet three requirements, as summarised by the High Court in Lanxess Pte Ltd v APP Chemicals International (Mau) Ltd [2009] SGHC 25:
- The assignment must be absolute, not merely by way of charge (security).
- It must be in writing under the hand of the assignor.
- Express notice in writing must be given to the person who owes the obligation (the debtor or counterparty).
The court also said that the notice must be clear and unambiguous, and that a mere statement of an intention to assign is not enough. No particular form of notice is prescribed.
An assignment that misses one of these requirements may still take effect as an equitable assignment. It is valid between the assignor and assignee, but the counterparty is not bound until it has notice, and it can keep paying the original company in the meantime. An equitable assignee may also need to join the assignor in any court claim. For a detailed look at assigning and enforcing receivables, see our guide to assignment of debt in Singapore.
What if the contract says it cannot be assigned?
Many commercial contracts contain an anti-assignment clause. Read it before doing anything. Common versions include:
- A flat prohibition: neither party may assign or transfer any rights or obligations.
- A consent requirement: no assignment without the other party’s prior written consent, sometimes “not to be unreasonably withheld”.
- A group carve-out: assignment to a related company is permitted on notice.
- A change of control clause: a sale of shares in the contracting company is treated as an assignment, or allows the other party to terminate.
Where a clause prohibits assignment, an assignment made without consent is generally ineffective against the counterparty and may itself be a breach. The safe course is to obtain written consent, or to move to a novation where the counterparty signs anyway. The precise effect of a particular clause depends on its wording, which is a point to have reviewed if the contract is valuable.
How does a novation work?
A novation is a fresh agreement among three parties. The counterparty agrees to release the outgoing company and accept the incoming company. The incoming company agrees to perform and be bound. The outgoing company is released from future performance. Each party gives something, usually the mutual releases and promises, which supports the new contract. Many businesses also sign novations as deeds to avoid arguments about consideration.
A novation agreement for an SME contract usually needs to deal with these points:
- Parties and the original contract, identified by date, parties and any amendments.
- Effective date from which the incoming company takes over.
- Release of the outgoing company, and whether it covers only obligations after the effective date or also past breaches.
- Assumption by the incoming company, including whether it takes on liabilities that arose before the effective date.
- Accrued amounts: who receives payments for work done before the switch, and who must refund deposits or credits.
- Security and guarantees: whether existing guarantees, bank guarantees or deposits are released, replaced or transferred.
- Confirmation by the counterparty that no claims are outstanding, if it is willing to give one.
- Governing law and signing formalities, including authority to sign for each company.
These are the subjects a well-drafted novation covers. They are not a template. The release and assumption wording in particular decides who carries historic risk, so it should be prepared or checked by a lawyer for any contract of real value.
Assignment vs novation at a glance
| Point | Assignment | Novation |
|---|---|---|
| What moves | Rights (benefits) only | The whole contract, rights and obligations |
| Counterparty consent | Not needed by general law, but often required by the contract | Always needed |
| Original party still liable? | Yes, for its obligations | No, once released |
| Number of parties to the document | Two (assignor and assignee), plus notice to the counterparty | Three |
| Formalities | Writing and written notice for a legal assignment under s 4(8) Civil Law Act | A new agreement, often signed as a deed |
| Counterparty’s defences | Generally preserved against the assignee | Governed by the new agreement |
| Typical use | Selling receivables, assigning sale proceeds, security | Business sales, restructurings, moving a contract to a new company |
Which do you need in common business situations?
Selling the business as an asset sale
In an asset sale the buyer acquires the business, not the company, so customer and supplier contracts stay with the seller until each is novated or, for benefits only, assigned. Buyers usually make novation of key contracts a completion condition or set a period after completion to collect signatures. Our guide to asset sale or share sale explains why a share sale often avoids this exercise, subject to any change of control clauses.
Group restructuring
Moving contracts from one group company to another is still a transfer to a different legal person. Check each contract for a group carve-out. Where there is none, novate. Staff are a separate question: section 18A of the Employment Act deals with employees on a transfer of an undertaking, and work pass holders need separate steps with MOM, as explained in our article on transferring work pass holders during a restructuring.
Moving from a sole proprietorship to a new Pte Ltd
A sole proprietorship is not a separate legal person, so its contracts are the owner’s personal contracts. Incorporating a company does not move them. Leases, supplier accounts, customer contracts and equipment financing must be novated or replaced, and until then the owner remains personally liable. This is one of the practical steps in converting a sole proprietorship to a Pte Ltd.
Is stamp duty payable on an assignment or novation?
Stamp duty in Singapore applies to documents relating to immovable property and to stocks and shares. An assignment or novation of an ordinary trading or services contract does not usually fall within that scope. If the contract being transferred is a lease or tenancy of property, or the transaction also transfers shares, check the stamp duty position on the IRAS stamp duty pages before signing.
A practical checklist for transferring a contract
- List every contract to be moved and its value, term and renewal date.
- Read the assignment, change of control, termination and notice clauses in each.
- Decide for each contract whether you need only the benefit (assignment) or the whole contract (novation).
- Agree internally how pre-transfer liabilities, payments and deposits will be split between the outgoing and incoming companies.
- Approach the counterparty early. Its consent is commercial as well as legal, and it may ask for new credit checks or a guarantee.
- Prepare the assignment and notice, or the novation agreement, and confirm who is authorised to sign for each company. Our article on authority to sign company contracts explains why this matters.
- Pass board resolutions where the constitution or internal policy requires them.
- Serve written notice on the counterparty for an assignment, and keep proof of delivery.
- Update invoicing details, bank details and contact persons, and keep the signed documents with the contract file.
Documents to gather
- The original contract, all amendments, side letters and current purchase orders.
- Bizfile profiles of the outgoing and incoming companies.
- Board resolutions approving the transfer and authorising signatories.
- The assignment and written notice, or the signed novation agreement.
- Any counterparty consent letter.
- Records of deposits, guarantees and amounts outstanding at the effective date.
Example
Example: Lim runs a renovation business as a sole proprietor and incorporates Lim Interiors Pte Ltd. He has a two-year maintenance contract with a condominium developer and a supply arrangement with a tile importer. He emails the developer saying the contract is “assigned” to the new company and starts invoicing in the company’s name. Six months later a defect claim arises from work done before incorporation. Because there was no novation, the developer can pursue Lim personally on the original contract, and the company’s own right to be paid is uncertain because the email did not clearly meet the requirements for a legal assignment. Had Lim asked the developer and the importer to sign novation agreements, with an agreed position on pre-incorporation defects, the company would have stood in his place from a fixed date.
Frequently asked questions
Does the counterparty have to agree to an assignment?
Not under the general law, if only the benefit is assigned and the right is not personal. However, many contracts require prior written consent, so check the contract first.
Is an email enough to novate a contract?
A novation can in principle be agreed in writing by exchange, but the safest approach is a single signed document that clearly identifies the contract, the effective date and the releases. A vague email exchange invites argument about whether there was a novation at all.
If we sell shares instead of assets, do we need novations?
Usually not, because the contracting company stays the same. You still need to check change of control clauses, which may require consent or allow termination.
Can the counterparty refuse to novate?
Yes. It cannot be forced into a contract with a new party. If it refuses, the options are to keep the contract in the original company and subcontract, assign only the benefit if allowed, or renegotiate.
Does the outgoing company remain liable for breaches before the novation?
That depends on the release wording. Some novations release the outgoing company from all liability, others only from obligations after the effective date. Read this clause carefully.
Need help transferring a business contract?
If your company, or you as a director or shareholder, is dealing with moving contracts to another company, contact the Raffles Corporate Services team at [email protected] or on WhatsApp at +65 8501 7133 or +65 9018 0072. We will help you understand the documents and deadlines. Where your matter needs a lawyer, we will refer you to a firm on our panel of Singapore law firms that regularly handles commercial contracts. Raffles Corporate Services is a corporate services provider, not a law firm, and this article is general information, not legal advice.
The Raffles Corporate Services Editorial Team, Raffles Corporate Services