Oregon 30-Hour Real Estate Law Practice Test

What distinguishes assignment from novation in contract law?

1. Assignment terminates the original contract

2. Both involve transferring obligations

3. Novation releases the original party from obligations

4. Novation requires approval from a third party

The correct answer is: Novation releases the original party from obligations

In contract law, the distinction between assignment and novation is crucial for understanding how obligations can be transferred between parties. Novation involves not only the transfer of rights but also the transfer of obligations, and it requires the consent of all parties involved, including a third party who will assume the obligations of one of the original parties. The essential characteristic of novation is that, upon its execution, the original party is released from any further obligations under the contract. This means that the new party steps into the original party's shoes, assuming both the rights and duties. This release of the original party is what differentiates novation from an assignment. In an assignment, the original contract remains in effect, and the original party retains ultimate responsibility for the performance of the contract, even if they have assigned their rights to another party. Therefore, while both mechanisms involve the transfer of rights and potentially obligations, novation specifically provides a clean break from the original party's responsibilities, thereby relieving them of any obligations once the transfer is complete.