Assignment and defined terms in commercial contracts, a plain-English guide

Two features appear in almost every commercial contract, and both are easy to skim past: the assignment clause and the definitions section. The first controls who can take over a party's rights under the agreement. The second controls what the agreement's key words actually mean. Together they decide how much flexibility you keep and how much you have promised.

This guide explains what "assign" and "define" mean in Australian contracts, the legal requirements that make an assignment effective, the difference between assignment and novation, and the mistakes that most often cost small and medium businesses money. It is written for business owners who sign, negotiate or draft contracts and want to read the fine print with confidence.

What assignment means

To assign a contractual right is to transfer the benefit of it to someone else. The party giving the right up is the assignor; the party receiving it is the assignee. The clearest example is the right to be paid. If a supplier assigns its right to receive payment under a supply agreement, the assignee stands in the supplier's place for that right alone: from then on the customer pays the assignee, and the assignee can enforce the right in its own name once the assignment is properly made.

Assignment deals only with benefits, never with burdens. An obligation, such as the duty to deliver goods or perform services, cannot be shifted by assignment. It stays with the original party. Moving obligations as well as rights requires novation, a different process in which the parties agree that a new party will replace an existing one, the old contract is discharged, and a new contract comes into being between the continuing party and the incoming party. Because novation rewrites the relationship, it needs the consent of everyone involved.

Contract rights are a form of property the law calls a chose in action: a right enforceable by legal action rather than a physical thing you hold. Debts, payment rights and the benefit of a contract are all choses in action, which is why they can be assigned at all.

What makes an assignment effective

Australian law sets out when an assignment of a debt or other chose in action passes the legal right to the assignee. In New South Wales the rule is in s 12 of the Conveyancing Act 1919 (NSW); in Victoria, s 134 of the Property Law Act 1958 (Vic) is in mirror terms, and the other states and territories have equivalent provisions. Three requirements must be met:

• Writing: the assignment must be made in writing under the hand of the assignor.
• Absolute: it must transfer the whole right, not merely charge it as security.
• Notice: express notice in writing must be given to the debtor or other person who owes the obligation.

The notice requirement is the one most often missed, and it is the one that makes the assignment effectual in law. Under both provisions the legal right passes only from the date the debtor receives express written notice. If notice is never given, the transfer may still be effective between assignor and assignee in equity, but the assignee's position is weaker: it generally cannot sue the debtor in its own name without joining the assignor, and where the same right has been assigned more than once, the order in which the debtor received notice can determine which assignee has priority.

What your contract says about assignment

Statute sets the default rules, but the contract itself usually matters more. Most commercial agreements say something about assignment: some allow it freely, some prohibit it outright, and many permit it only with the other party's prior written consent. That clause governs between the parties. Assigning in breach of it is a breach of contract, even if the assignment would otherwise be effective at law, and it can expose the assignor to a claim for damages.

Consent language repays close reading. A common compromise is consent "not to be unreasonably withheld", which gives the other party a genuine say without letting it block sensible transfers. Some agreements go further and authorise assignment in advance, sometimes covering novation as well. Clauses of that kind are enforceable. In GE Commercial Corporation (Australia) Pty Ltd v Wallis [2015] NSWSC 704, a financier bought another company's invoicing business, and the facility agreements and guarantees in question let the financier assign and novate its rights and obligations without fresh consent on each transfer. The court upheld the arrangement, noting the distinction between assigning a contract and novating it.

If you expect to sell the business, raise money against invoices or move contracts between related entities, negotiate the assignment clause before you sign, not at the exit. Ask whether assignment needs consent, whether consent can be withheld unreasonably, and whether transfers within your group or of payment rights are carved out.

Why obligations need a novation

Because assignment can move only benefits, any transaction that needs the whole contract to change hands, obligations included, requires a novation. As the New South Wales Court of Appeal observed in CSG Ltd v Fuji Xerox Australia Pty Ltd [2011] NSWCA 335, there is a distinction between the novation of a contract and its assignment. Novation substitutes one party for another: the old contract is discharged, a new one is made, and because every party's position changes, all parties must consent. It is usually documented in a deed or a signed agreement.

The practical difference shows up in business sales and refinancings. If you only need the right to future payments to move, for example to a financier, an assignment can do the job. If a buyer needs to take over your service obligations to customers as well as the right to be paid, an assignment leaves you still on the hook for performance; only a novation, with the customer's consent, hands the obligations over cleanly.

What "define" means: defined terms and scope

To define a term in a contract is to give it a specific meaning that governs how the agreement is read. Defined terms usually appear in a definitions section near the start of the agreement and are capitalised throughout: "Products", "Services", "Confidential Information", "Fees". Every time the capitalised term appears, it carries the defined meaning rather than its everyday one.

Definitions are not housekeeping. They set the scope of what you promise and what you receive. If a definition is too broad, you may have promised more than you intended. If it is too narrow, you may lose protection you assumed you had. Courts interpret commercial contracts objectively, by what a reasonable person in the parties' position would have understood the words to mean, as the High Court confirmed in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451. Where a term is defined, the definition is part of that context and ordinarily controls.

A few drafting habits keep definitions reliable. Avoid circular definitions, where a term is defined by reference to itself or to another undefined term. Use plain English and define technical terms simply. Capitalise and use each defined term consistently. And tailor definitions to the actual deal: a definition borrowed from a template or another transaction can quietly import obligations you never agreed to. Definitions also work with the interpretation clause, the boilerplate that covers singular and plural, gender, and phrases such as "including" and "including without limitation".

A worked example: the right to be paid and the meaning of Products

Take a Melbourne packaging supplier with a two-year supply agreement with a national retailer. The agreement defines "Products" as the supplier's range of boxes and wrapping, lists the models covered and excludes trial lines. It also says neither party may assign without the other's prior written consent, not to be unreasonably withheld.

Twelve months in, the supplier wants to improve cash flow by selling its outstanding invoices to a finance company. The right to be paid under those invoices is a debt, and therefore a chose in action, so the supplier assigns that right to the financier. To make the assignment effective at law the supplier needs a written, absolute assignment and must give the retailer express written notice, so the retailer knows to pay the financier from that date. Because the contract requires consent, the supplier also obtains the retailer's written consent first. What does not move is the supplier's performance: the supplier still has to deliver the boxes and stand behind them, because assignment never carries obligations.

Now change one detail. The supplier starts producing compostable packing material and assumes the retailer must accept it because it is "a product". It is not a "Product" as defined, so the retailer can reject it and the supplier cannot insist on supplying it under the contract. One definitional gap, and a promising new line cannot be delivered through the existing agreement.

Common misconceptions about assignment and definitions

A few misconceptions about assignment and definitions come up again and again in small-business contracts, and each can cost money. Here is what each one gets wrong:

• "I can assign the whole contract, obligations included": Assignment moves only benefits. Your obligations stay with you, and you remain liable for them, until a novation replaces you with everyone's consent.
• "Assignment always needs the other party's written consent": Only if the contract says so. The statutory requirements are writing, an absolute transfer and notice to the debtor; consent is a contractual matter, not a legal one.
• "Notice is just a courtesy": Express written notice is what makes the assignment effectual in law against the debtor. Without it, the assignee's rights are at best equitable, and enforcing them directly is more complicated.
• "Definitions are drafting housekeeping": A definition sets the scope of your promises. Sloppy or borrowed definitions are a common source of disputes about what was actually agreed.
• "A verbal promise to assign is enough": The statutory assignment must be in writing under the assignor's hand. An oral arrangement may not transfer the legal right at all.
• "A defined term just restates the ordinary meaning": The definition governs. If "Products" is defined to include software, the everyday meaning of the word does not limit what you must supply.

When a lawyer should look at your contract

Because assignment and definitions interact with the rest of the agreement, small wording choices can have large consequences. A commercial lawyer can help in several concrete ways. Before you sign, a lawyer can check whether the assignment clause fits your plans to sell, restructure or raise finance, and can negotiate consent mechanics, carve-outs for related entities and the treatment of payment rights. A lawyer can also review the definitions against the scope of what you actually deliver, so you promise no more and no less than intended.

When a transfer is happening, a lawyer can prepare the assignment document, the consent letter and the notice in the correct form, or a deed of novation where obligations must move as well. Where an assignment is disputed, or a financier's security depends on the effectiveness of a transfer, legal advice on the requirements in your state and the terms of the contract can identify whether the right has actually passed. For businesses running standard terms, a lawyer can build a definitions framework once, so that new contracts, variations and renewals stay consistent.

Two questions to ask before you sign

Everything in this article reduces to two questions you can put to any contract in front of you. First, can this contract move with your business: can the rights be assigned, to whom, and with whose consent? Second, do the definitions describe exactly what you are promising and exactly what you are getting? If you cannot answer both from the page, the contract is not finished. The business that loses flexibility on assignment is usually the one that signed a restrictive clause years before a sale, not the one that planned for the sale. The business that over-promises is usually the one that copied a definition from another deal. Checking both before you sign takes minutes and protects years of options.