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I am trying to get my head around how the law perceives and deals with an element of how countries deal with contractual obligations where the contracting parties change. The specific case is this

Party A limited trading as A enters into an agreement with party B to perform work for them.

Party A limited subsequently sells their business to party C (and stops trading).

Party C continues the business "trading as" A. Party A neglects to send formal notice to party B advising that they have sold their business and obligations to party C

Party C works with party B and performs the obligations and of party A. Party C then bills party B. Party B refuses to pay (but does not specify the reason for their refusal) Party C sues party B for non payment in a disputes tribunal, and it is only at this point that party C discovers the reason for non-payment.

Party A and Party C are willing to work together to recover the debt from party B. If Party C amends their filing, does party A become a joint applicant, a third party or something else? Does Party A need to make a demand on party B and restart the whole application?

(As this is in New Zealand, a New Zealand perspective would be appreciated, otherwise how would this typically be handled in a commonwealth country?)

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  • Saying that A “sold their business and obligations to party C” does not provide enough detail. Selling a business can mean different things legally, depending on the nature of the business. Selling an obligation doesn’t make sense – a creditor’s rights wouldn’t be worth much if the debtor could unilaterally transfer their obligations to somebody else. This requires a novation.
    – sjy
    Jun 25, 2021 at 13:00
  • Are you using "limited" as an adjective, as in "limited liability company"? That's rather confusing. Jun 26, 2021 at 2:02
  • @Accumulation As in "Limited Liability Company".
    – davidgo
    Jun 26, 2021 at 2:55

3 Answers 3

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If Party C amends their filing, does party A become a joint applicant, a third party or something else?

A is a non-party. It is unclear from your description why C would need to amend the filing, but there is no need for A to become a joint applicant. By virtue of C's buyout of A, only C has standing to sue B.

Your description does not specify B's reason for non-payment, but generally speaking that does not defeat's C's standing for suing B.

Had B's contract with A reflected that B's intent is to not be in a contract relation with C, the matter might involve (1) rescinding B's contract with C; (2) a judgment on grounds of equity; (3) C's claim against A for the latter's omission; or (4) a combination of these. But the description has too many gaps in that regard, thereby precluding a more precise assessment.

Does Party A need to make a demand from party C and restart the whole application?

No. A has no viable claim against C. And A's sale to C implies that A can no longer have a viable claim against B either.

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  • Thank you for your response. Party B is refusing to pay party C because they contracted to party A (ie dealt with A Limited). I also see that I made a mistake in my second last paragraph. I should have said "Does party A need to amke a demand on party B..."
    – davidgo
    Jun 25, 2021 at 10:49
  • Thank you for your answer - it has been helpful - if nothing else it has helped me clarify my thinking - and prompted me to ask "does party A have the right to assign an agreement to party C" - and this has gotten me a lot closer to understanding the law.
    – davidgo
    Jun 25, 2021 at 10:55
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    Reading more - I expect that this is a novation rather then an assignment (because C had to perform work for A, not only get paid). There was no consent of party B. I am "concerned" that party B has a claim that there was no valid novation and thus they don't owe party C money. In this way I don't know how party A and Party C can ensure party C get paid!
    – davidgo
    Jun 25, 2021 at 11:03
  • @davidgo "does party A have the right to assign an agreement to party C" A is allowed to transfer to C all of A's business rights pursuant to the sale, except in scenarios of (1) B's preceding refusal to have a contract with C (since this would imply that there is no cognizable contract between B and C), or (2) where the terms B's contract with A indicate that a novation ought not to be obviated. Even if B's requirement of novation is not met, C might prevail on grounds of unjust enrichment or of equity. But the details matter. Jun 25, 2021 at 11:16
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    Yes, I think you are correct, and I have come to the same conclusion. I'm not sure there is a point in getting into the fine details, but I think you are spot on in your observations, including "unjust enrichment/equity" I have accepted your answer.
    – davidgo
    Jun 25, 2021 at 11:20
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You asked: how does the law deal with contractual obligations where the contracting parties change? As you have identified in the comments, the answer has to do with the concept of novation – that is, the formation of a new contract with different parties. The consent of all parties to the original contract is required to replace their rights and obligations with new rights and obligations defined in the novated contract.

The other answers appear to be discussing the concept of assignment. Assignment should not be confused with a change of contracting parties, or a “transfer of contract” (which is not a meaningful concept at common law). It is often possible to unilaterally assign the rights accrued under a contract to a third party, but it is not possible to assign the obligations.

Specifically, the contractual right that can be assigned under New Zealand law is a “thing in action”: section 50 of the Property Law Act 2007. In other common law countries this is still called a chose in action, meaning the right to sue. For most businesses, a chose in action is more like an “invoice” than a “contract.”

If A does work under a contract with B and becomes entitled to payment, this entitlement is a chose in action that can (generally) be unilaterally sold to C. This commonly occurs where C is a debt recovery or factoring business. However, the contract between A and B which says that B must pay A when A does certain work is not a chose in action. It is a relationship that gives rise to a chose in action only when A does the work. Unless the contract is novated, C has no right to do the work and sue on the contract between A and B. This is the doctrine of privity of contract.

If C has nevertheless done the work without a novation, there are two ways that C might get paid. One is for C to sue A, claiming that A subcontracted the work to C. In this situation, from B’s perspective, A is still responsible (and entitled to be paid) for the work. B does not have to pay C, and A is only required to pay C the amount agreed under the subcontract. It could be difficult to argue that a business sale agreement created this kind of subcontract.

The other way is for C to sue B on the basis of the equitable doctrines known as unjust enrichment, quasi-contract or quantum meruit. These doctrines are complicated, but essentially based on the idea although B never agreed to pay C for the work, it would be unfair to allow B to benefit from the work. Again, C may not be entitled to the full amount of money that B agreed to pay A, because its rights are based on the court’s assessment of what equity requires, not the terms of the contract between A and B.

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Contracts can be transferable … or not

By default, in common law countries (like New Zealand) contracts are transferable unless they are for personal services (e.g. employment contracts from the employee).

However, particular contracts can be explicitly non-transferable.

When a contract is transferred, there is no requirement (legally) to advise the other party although there are administrative reasons to do so - like they will be getting invoices from someone else.

If the contract is transferable then party A Is not involved (except as a witness), if it isn’t, then party B isn’t.

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