Novation and Assignment Explained

Novation and Assignment Explained

Novation is a mechanism whereby one party can transfer all its obligations under a contract and all its benefits arising from that contract to a third-party. The third-party effectively replaces the original party as a party to the contract. When a contract is novated the other contracting party must be left in the same position as he was in prior to the novation being made. A novation requires the agreement of all three parties involved.

An assignment is a transfer, recognised under law, of a right or obligation of one person to another. Assignment differs from novation in so much that the parties to the contract do not change. Most rights and obligations are capable of assignment.

An assignment of a right arising under a contract is an exception of the rule of privity in that rights are conferred upon persons who are not a party to the contract. It must be noted that a burden (i.e. a contractual liability, such as the liability to pay for the works) cannot be assigned. Contracts used in the construction industry often contain terms restricting or prohibiting assignments. Such terms have the effect of making any purported assignment invalid as against the other party to the contract – see Linden Gardens v Lanesta Sludge [1994] 1 AC 85 where a badly drafted clause in a now superseded version of a JCT Form of Contract was held to prevent the assignment of certain rights under the that Contract. However, the right to prevent assignment may be lost by waiver.

Perhaps the most widespread use of assignment in the construction industry today is in connection with collateral warranties. The collateral warranties given by consultants, contractors and sub-contractors are often assigned to subsequent owners or leases. Assignment can do no more than transfer rights available to the assignor; it is not capable of creating new rights in favour of an assignee. Thus while the client can in theory assign the right to have a building adequately designed, it is unclear what right would be transferred to sue for damages in the event of breach. If the developer/assignor has sold the building or created a full-repairing lease, then his right would be to nominal damages only. A solution that avoids these problems is to draft the document in the form of a novation, where the assignee third-party may take over the full contractual rights of the developer, as though named as an original party of the building contract.