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{{ | {{a|negotiation| | ||
[[File:Penrose-dreieck.svg|450px|thumb|center|An [[assignment and assumption]] agreement yesterday]] | |||
Unlike an [[assignment]], a [[novation]] requires | }}In layperson’s terms a [[novation]] is the transfer in full of one party’s rights and obligations under a {{t|contract}} to another person. The '''transferor''' steps out of the contract and is no longer bound by it. The '''transferee''' steps in to the contract and assumes all the transferor’s obligations. The '''remaining party''' stays put, but must perform to, and may expect performance from, the transferee and not the transferor. | ||
===Bizarre love triangle=== | |||
Unlike an [[assignment]], a [[novation]] requires all three parties to agree. A party to an [[English law]] {{t|contract}} may “[[assign]]” its ''[[right]]s'' to a third person without its counterparty’s permission (as long as the contract does not forbid it); however, it cannot unilaterally assign its '''[[obligation|obligations]]'''. | |||
There are pretty obvious economic reasons why that should be so: the creditworthiness of the party with whom you have contracted is a fundamental part of the bargain you have made: that party should not be able to substitute itself without your permission. | There are pretty obvious economic reasons why that should be so: the creditworthiness of the party with whom you have contracted is a fundamental part of the bargain you have made: that party should not be able to substitute itself without your permission. | ||
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===[[Consideration]]=== | ===[[Consideration]]=== | ||
The [[consideration]] given for terminating one contract and creating the other are related: In effect, there will be a [[MTM]] value payable to or from the [[transferor]] under the first, and an equal payment to or from the [[remaining party]] under the second, so [[transferor]] and [[transferee]] settle these payments directly between each other. [[Remaining party]]’s obligation to discharge [[transferor]] of its liabilities under the terminating {{t|contract}} is conditional on [[transferee]]’s agreement to accept the identical liabilities under the new [[contract]]. | The [[consideration]] given for terminating one contract and creating the other are related: In effect, there will be a [[MTM]] value payable to or from the [[transferor]] under the first, and an equal payment to or from the [[remaining party]] under the second, so [[transferor]] and [[transferee]] settle these payments directly between each other. [[Remaining party]]’s obligation to discharge [[transferor]] of its liabilities under the terminating {{t|contract}} is conditional on [[transferee]]’s agreement to accept the identical liabilities under the new [[contract]]. | ||
===[[Assignment and assumption]] agreement=== | |||
Counterparties to [[equity derivatives]] worry a lot about tax. When reorganising their derivatives portfollios between their prime brokers, they are given to the concern that a standard [[ISDA]] novation may be a “taxable event” by terminating the existing [[in-the-money]] transactions at a profit, thereby realising a taxable gain that might not (yet) have arisen had the {{isdaprov|Transaction}} just carried on as it was. | |||
Whether this is true or not is a matter for local [[tax attorney]]s — fools rush in where ''they'' fear to tread — but, the [[battle of form and substance|battle of form over substance]] being what it is, you would like to think one could mount a sensible argument that seeing as a fund’s net market exposure before and after a [[novation]] doesn’t change, the novation should be tax neutral, but — [[chicken licken]] and all that. | |||
Anyhow, one hopeful — but, to these cynical eyes, foolish — solution is to document the transfer not as a novation but an “[[assignment and assumption]]”. | |||
{{assignment and assumption capsule}} | |||
===Trick for young players=== | |||
This is where one where unless you are careful, you may need to rely, more heavily that you would like, on the [[legal eagle]]’s old friend [[mutatis mutandis]]. | |||
Many [[service contract|service contracts]] allow service-providing parties to [[delegate]], [[sub-contract]] or otherwise [[Outsourcing|outsource]] the substantive meat and drink of what they have promised to do for their clients (alas — such is the obsession of our mildewed times, with [[rentier]] behaviour). Now that is all well and good, but the client’s [[legal eagle|juridical birds of prey]], bridling at what they (rightly) see as an inclination towards outright dereliction of duty, will insist some limits on this right to subcontract. You may only sub-contract, they will say, to your own [[affiliate|affiliates]]. | |||
{{sa}} | {{sa}} | ||
*[[ISDA Novation Anatomy]] | *[[ISDA Novation Anatomy]] | ||