It is important to understand the difference between assignment and novation when engaging in construction and engineering projects.
There are significant legal distinctions between the two, with serious consequences for all parties involved if they are not handled properly.
What is novation?
Novation is the legal name given to the process whereby both the benefit and the burden of a contract are transferred from one party to another. For example, a contract that has been entered into between an employer (A) and a contractor (B) is novated to a third party (C), which has the effect that C 'takes over' the obligations of A - and A 'falls away' such that it has no further obligations under the contract.
Novation is a common agreement in construction and engineering projects, particularly in relation to design and build procurement where design consultants' appointments are transferred from the employer to the contractor in line with the contractor's single point of design responsibility.
Novation of a contract requires the consent of all parties and usually requires a formal novation by entering into a tripartite novation agreement. Such an agreement must be executed properly and the terms must be clear and unambiguous.
What is assignment?
By contrast, assignment is the process whereby the benefit of a contract is transferred from one party to another but the burden of the contract remains with the original party to the contract. For example, the employer (A) may assign a building contract made between it and the contractor (B) to a third party (C). C would then be entitled to the right to have the works constructed and the right to sue the contractor in the event that the works are defective, but the obligation to pay for the works remains with A. A still owes obligations to B and will remain liable to fulfil its obligations during the course of the contract.
Assignment often arises in construction and engineering projects when transferring the benefit of collateral warranties (for example, from a first tenant to a second tenant).
Why is the distinction important?
Failure to execute a deed of novation properly can result in the loss of a party's legal rights. Further, unclear and ambiguous wording in a novation agreement may lead to a contract only being assigned.
A failed novation that leads to a deemed assignment means that the assignor will still be liable under the terms of the contract, contrary to the intention of the parties.
Conversely, there can be many reasons why assignment is preferable to novation. For example, if a buyer does not want to take on the burden of the consultant's payment of fees, it will want the developer to assign the benefit of the consultant's appointment.
It is important to consider whether it is intended for both the benefit and the burden of a contract to be transferred or solely the benefit before entering into a legal document to transfer them.
To enable a successful novation to take place, a formal agreement should be executed and the consent of all parties should be obtained.
The terms of any novation agreement should be clear and unambiguous to avoid it being mistaken for an assignment.