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Novation between an original company, a substituted company and an agent

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Novation Between an Original Company a Substituted Company and an Agent

Memorandum of agreement between original company, substituted company and agent company.

After a contract is formed, legal principles apply to govern the legal relationship. These fundamental principles underlie all contracts.
The basic principles of contract law include:
• Formation - making a contract;
• Consideration in contract law;
• Privity of contract;
• Variations: changing legally binding contracts;
• Novation: assignment - transfer of contractual rights
• Entire contracts and divisible contracts;
• Termination: how contracts end;
• Remedies for breach of contract.
Once a person signs a contract, the basic rule of law is that they are bound by their signature, whether they have read the contract or not, or understood the document or not.

Privity of Contract: Exclusivity of Legal Relationship

The doctrine of privity of contract consists of two general rules:
• a third party to a contract, someone who didnt sign it, cannot be sued under it. As a consequence a third party to the contract cannot be required to perform the contract, and cannot incur liability under it.
• A person who is not a party to a contract cannot sue on the contract to obtain the promised performance.

Privity of contract is required to give rise to a legal obligation to perform it or be sued on the contract. In the usual case, the person must be a party to the contract. The right to sue is acquired by being a party to the contract.

The usual cases are:

• for a written contract, the legal person who signed it;
• in an oral contract case, it will be the legal person who agreed to the terms.
Privity of contract still applies when an agent operates to create a contract on behalf of the principal.

An agent can make a contract for its principal with a third party, by making a contract between:

• the third party and the principal, without the agent becoming a party to the same contract;
• the agent signs as agent on behalf of the principal. Only the principal can sue or be sued under the contract;
• the third party and the principal, with the agent also becoming a party. Either the agent or the principal can be sued under the contract;
• the third party and the agent, but without the principal being a party to the same contract.

Novation: Assignment & Transfer of Contractual Rights

The legal obligations under a contract cannot be "assigned" or transferred to another person without the agreement from the other contracting party or parties.
To transfer contractual obligations the requirements of novation must be satisfied.

In novation, there is no assignment of rights and obligations, a new contract is created with new rights and obligations, with a new contracting party.

The benefit of a contract rather than the burden, which are the legal obligations, can be transferred without the permission of the other contracting party.

The burden of a contract:
In the majority of business contracts, one party will have the obligation to pay money.
The benefit of a contract:
Where a seller is entitled to be paid money under the contract, that right will be the benefit of the seller under the contract. The counterparty (the buyer) will have the benefit of receiving goods or services.

The “benefit” of the contract can be assigned without the permission of the other contracting party unless:
• the contract is one for personal services, such as contracts of employment
• an express term or implied term of the contract prevents it Burden:
The burden of a contract is the obligations that the party itself must perform:
• the buyer: the burden of the contract is to pay money;
• the seller: the burden of the contract is to deliver the service.
How Novation works

Novation takes place when all the contracting parties to an existing contract agree that:
• one of them will no longer be bound by the contract;
• a new contracting party will replace one of them;
• an incoming contracting party agrees to take on the burden of the contract for one of the parties. Both (or all) of the parties to the existing contract agree that the incoming contracting party will perform the contract (and replace one of the parties).

The end result is that a new contract is created between the remaining contracting parties and the incoming contracting party. The exiting contracting party is no longer bound to the contract.
The contractual rights between the existing parties before the novation remain in force. After the novation, it is the remaining parties and the incoming party who are contractually bound.
As at the date of the novation (the transfer of rights), it is the future benefits of the contract which are transferred. Accrued rights prior to the transfer remain with the original (outgoing) contracting party.
The new contract is identical to the old contract. It just has different parties.
Why is Novation required to transfer rights?

1. Assignable contractual rights are ‘chose in action’. Chose in action are intangible rights to sue for enforcement of the contract. These are rights in personal property.
As with any other personal property, a chose in action can be transferred to a third party in accordance with the formal rules governing their transfer.

2. It is not legally possible to assign the burden of a contract (the obligation to render performance). However, it may be possible to assign the following:
• the entire benefit of a contract (the right to receive performance);
• if a right under a contract is separate and severable, that separate and severable right;
• if only some of the rights under a contract are assignable, those rights.
Assignment clauses may expressly or impliedly:
• authorise assignment of rights in a contract which would not otherwise be assignable; or
• prohibit assignment of rights which would otherwise be assignable.
While the product to be derived from a contractual performance may be assigned, the right to that performance may, nonetheless, not be assignable because:

• the identity of the person to perform is material to the contractual relationship itself;
• the nature of the contract prevents it, such as contracts requiring personal performance. Employment contracts require personal performance;
• the contractual performance to be rendered, such as where the contract requires a party to act on the other’s instructions. A contractual right will not be personal if it can make no difference to the other party who delivers the products or services.
An assignee of a contractual right under a legal assignment is entitled to sue for enforcement of the right.
Novation will ordinarily require the agreement of the original and the substituted party.
Assignment clauses can set up a situation where novation is pre-agreed.
Variations: Changing the Contract

Contracts are legally binding which means that they cannot be changed by any of the parties without the agreement of all the parties to the contract.
Changing a contract, known as a "variation", requires another legally binding agreement to change the original legally binding agreement. This means that the elements required to form a contract must be satisfied again to vary the terms.
Unless the existing contract says so, there are no formal requirements that must be satisfied for the variation to constitute a binding contract. That is, it does not have to be in writing.
Amendments to Agreements: Form of Variations

The existence of a separate agreement must be able to be proved. There are two options:
• New contract: preparing and signing a completely new agreement which replaces the first.
The original contract is ended in its entirety and replaced with a completely new contract.
• New contract, vary clauses: signing a new agreement which varies specific provisions of the first contract.

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