In construction projects, contracts often need to be transferred from one party to another in the event of a change of circumstances, such as corporate restructurings, project sales, or changes in ownership. Two key legal mechanisms that can be used to achieve this transfer are assignation and novation. While both serve to provide for a new party’s interest, they have distinct legal and practical implications that must be carefully considered to ensure alignment with the parties’ objectives. Although similar principles apply in both English law and Scots law, this article will focus on Scots law.
Assignation
Assignation is used when a party wishes to transfer its rights and/or interests (only) in a contract to another party. This mechanism is commonly employed in business sales or intra-group reorganisations where contracts need to be transferred as part of the transaction.
However, assignation only transfers rights and not obligations. While an employer may assign their right to have works completed, they cannot assign their obligation to pay for those works. This is simply because contractual burdens cannot be assigned.
The practical effect of assignation is that the assignee (the party receiving the rights) is entitled to enforce those rights against the original counterparty. However, the assignee can only enforce rights that the assignor (the original party) already possessed - assignation in itself does not create new rights as such. Once assigned, the assignee effectively steps into the assignor’s position regarding the benefits of the contract, but the assignor remains responsible for any ongoing contractual obligations.
A key requirement for assignation to be effective (and "perfected") under Scots law is intimation - a formal notification to the counterparty (the other original contracting party). Without intimation, the assignation does not take full legal effect, meaning the counterparty is not bound to recognise the assignee’s rights. If the contract allows for assignation without consent, the counterparty's approval is not needed. The assignor can transfer its rights by executing the assignation and notifying the counterparty.
If the contract is silent on whether assignation is permitted, the common law position is that without an express assignment clause, the benefit of a contract may generally be assigned freely (i.e. without the need for the counterparty's consent).
Novation
Novation is used when a party to a contract transfers bothits rights and obligations to a third party. Unlike assignation, novation (as traditionally understood) replaces the original contract with a new one, under which the incoming party assumes the same rights and responsibilities as the outgoing party. As a result, the outgoing party is fully released from its contractual obligations. While novation does not automatically cancel past rights and obligations under the original contract, the parties can agree to transfer these as well.
For novation to be valid, the outgoing party, the continuing party, and the incoming party must all provide their consent.
In the construction industry, novation is particularly common in design and build procurement. A typical example is when an employer novates consultant appointments to a design and build contractor, creating a single point of responsibility in the contractor for both the design and construction work. This reduces the risk of disputes for the employer with designers and contractors separately over defects or design issues as having a single party in the contractor accountable for both design and construction mitigates risks associated with fragmented responsibilities.
It is worth noting that construction documents are frequently novated in the following scenarios:
- to a purchaser when acquiring a building before its completion; and
- to another company within the same group as the developer client or contractor during group restructuring.
The Key Differences Between Assignation and Novation
- The primary difference between assignation and novation is that assignation transfers a right or interest in the project, whilst novation transfers both a right or interest and obligations.
- Assignation allows a party to transfer its rights under a contract to a third party, but the original party remains liable for any contractual obligations. In contrast, novation involves the transfer of both rights and obligations, effectively replacing the original contract with a new one in which the incoming party assumes full responsibility. As a result, the outgoing party is completely released from the contract.
- Assignation typically requires only notification to the counterparty, whereas novation requires the consent of all parties involved.
Practical Considerations
Understanding the difference between assignation and novation is essential in construction contracts, where contractual rights and obligations often shift between different parties. Failing to distinguish between the two can lead to unintended consequences, such as ongoing liabilities for an assignor or the need for additional consents in a novation scenario.
In practice, parties must carefully assess their objectives and the legal implications before deciding whether to proceed with assignation or novation. Clear contractual drafting, proper consent procedures, and an understanding of each mechanism’s impact are essential to ensuring a smooth transition of rights and/or obligations.
If you have any questions in relation to the matters discussed in this article or would like to hear more about construction contracts, please get in touch with one of our construction lawyers.
