It is common within the construction industry for a developer or employer to transfer the rights or obligations under the construction documents to a third party. This is usually done in one of two ways: by assignment or by novation.
Common examples of documents that are often assigned or novated include collateral warranties, professional appointments and building contracts.
Assignment and Novation: What are they?
Assignment is the transfer of an existing interest from one party to another. Assignment only transfers the benefit of a contract (a right) such as a right to sue. For example, if a building contract between A (employer) and B (contractor) is assigned to C (a third party), C has the right to sue B if the works are not constructed properly but the obligation to make payment under the contract remains with A. The rights assigned to C operate only from the date of the assignment and are not retrospective.
The burden (an obligation) of a contract is not assignable.
Novation is the transfer of an interest from one party to another but unlike assignment, novation includes both the benefit and the burden of a contract. It requires the consent of all parties involved (whereas an assignment would only involve A and C in the above example). Also, novation has retrospective effect, so that C would be treated as if it had always been the contracting party with A and B had never been involved.
The assignor may assign the benefit to a third party without the other contracting party’s formal agreement (providing there is nothing in the contract preventing or limiting assignment). Assignment also does not require the consent of the other party as only the benefit is being transferred therefore no obligations are being transferred to the third party. It is often therefore easier to arrange than a novation and is mostly used when a commercial development is finished and the new owner of the development wants to have the rights to sue under the building contract and other construction documents in case anything goes wrong in future.
Novation is carried out using a tripartite agreement with the agreement of all three parties for example A (employer), B (contractor) and C (third party). The novation extinguishes the contract between A and B and replaces it with a new contract on the same terms between A and C. B has no further obligations under the contract. Novation is often used in design and build (D&B) contracts where (for example) the architect has carried out the first stage design work for the employer and is then novated to the D&B contractor to carry out the second stage design work and to be part of the contractor’s team during the construction phase.
It is acceptable within the construction industry to limit the ability of assigning a document to two occasions only. If the parties want to assign both the rights and obligations under the contract, this is not possible.
Novation requires all parties’ consent which can lead to delays while negotiations are taking place. The terms of novation should be clear and failure to execute the document properly may result in the loss of one party’s rights.
Key things to consider
Will assignment be all you need or do you require novation? What are the parties’ intentions? If it is intended from the outset that certain documents will require novating in the future, agree the form of the novation document at the outset and append this form to professional appointments and building contracts.
Be careful to check whether your contract has a prohibition against assignment, either completely or not without the other party’s consent. If you fail to get the required consent the assignment will be ineffective. Standard form building contracts usually contain a prohibition on assignment without the contractor’s consent.
FIS members can contact the FIS Legal Helpline (0191 230 8860) or email email@example.com for assistance.