assignment by novation

Assignment vs Novation: Everything You Need to Know

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. 4 min read updated on September 19, 2022

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of the original counterparty.

The transfer of a benefit or interest from one party to another is referred to as an assignment. While the benefits can be transferred, the obligation or burden behind the contract cannot be. A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee. 

The assignor continues to carry the burden and can be held liable by the assignee for failing to fulfill their duties under the contract. Purchasing an indemnity clause from the assignee may help protect the assignor from a future liability. Unlike notation, assignment contracts do not annul the initial agreement and do not establish a new agreement. The original or initial contract continues to be enforced. 

Assignment contracts generally do not require the authorization from all parties in the agreement. Based on the terms, the assignor will most likely only need to notify the nonassigning party.

In regards to a contract being assignable, if an agreement seems silent or unclear, courts have decided that the contract is typically assignable. However, this does not apply to personal service contracts where consent is mandatory. The Supreme Court of Canada , or SCC, has determined that a personal service contract must be created for the original parties based on the special characteristics, skills, or confidences that are uniquely displayed between them. Many times, the courts need to intervene to determine whether an agreement is indeed a personal service contract.

Overall, assignment is more convenient for the assignor than novation. The assignor is not required to ask for approval from a third party in order to assign their interest in an agreement to the assignee. The assignor should be aware of the potential liability risk if the assignee doesn't perform their duties as stated in the assigned contract.

Novation has the potential to limit future liabilities to an assignor, but it also is usually more burdensome for the parties involved. Additionally, it's not always achievable if a third party refuses to give consent.

It's essential for the two parties in an agreement to appraise their relationship before transitioning to novation. An assignment is preferential for parties that would like to continue performing their obligations, but also transition some of their rights to another party.

A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one. In this new contract, a third party is now responsible for the obligations and rights. Generally, novation does not cancel any past obligations or rights under the initial contract, although it is possible to novate these as well.

Novation needs to be approved by both parties of the original contract and the new joining third party. Some amount of consideration must also be provided in the new contract in order for it to be novated, unless the novation is cited in a deed that is signed by all parties to the contract. In this situation, consideration is referring to something of value that is being gained through the contract.

Novation occurs when the purchaser to the original agreement is attempting to replace the seller of an original contract. Once novated, the original seller is released from any obligation under the initial contract. The SCC has established a three-point test to implement novation. The asserting party must prove:

• The purchaser accepts complete liability
• The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
• The creditor to the original contract accepts the new contract as the replacement for the old one

Also, the SSC insisted that if a new agreement doesn't exist, the court would not find novation unless the precedence was unusually compelling.

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Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

Table of Contents

• What is a Deed of Novation? 
• What is a Deed of Assignment? 

Key Differences Between Novation and Assignment Deeds

Need a deed of novation or assignment key factors to consider, selecting the right assignment clause for your contract – helping you make the right choice, what is a deed of novation.

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

• Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
• Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
• Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
• Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

• Nature of the Contract:  The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
• Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
• Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
• Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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Assignment And Novation Agreement

Jump to section, what is an assignment and novation agreement.

An assignment and novation agreement is a contract between two parties where one gives up their rights and responsibilities under an original contract. An assignment cancels the original contract and transfers the rights and responsibilities of one of the parties to another, third party. In novation, one of the parties surrenders their rights but retains the duties they took on under the original contract.

Each of these agreements allow a contract party to give up their rights if they desire. The specific type of agreement necessary depends on whether both parties can agree to removing both rights and responsibilities and canceling the original agreement

Common Sections in Assignment And Novation Agreements

Below is a list of common sections included in Assignment And Novation Agreements. These sections are linked to the below sample agreement for you to explore.

Assignment And Novation Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.4 5 ex10-4.htm ASSIGNMENT AND NOVATION AGREEMENT , Viewed September 18, 2022, View Source on SEC .

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Lawyers with backgrounds working on assignment and novation agreements work with clients to help. Do you need help with an assignment and novation agreement?

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Assignment vs. Novation

What's the difference.

Assignment and novation are both legal concepts that involve the transfer of rights and obligations from one party to another. However, there are some key differences between the two. Assignment refers to the transfer of a single party's rights under a contract to another party, while the original party still remains liable for the performance of the contract. On the other hand, novation involves the substitution of one party with another, where the original party is completely released from their obligations and the new party assumes all rights and liabilities. In essence, assignment is a transfer of rights, whereas novation is a transfer of both rights and obligations.

Further Detail

Introduction.

When it comes to legal agreements and contracts, there are various mechanisms that can be used to transfer rights and obligations from one party to another. Two commonly used mechanisms are assignment and novation. While both assignment and novation involve the transfer of rights and obligations, they differ in their legal implications and the extent of the transfer. In this article, we will explore the attributes of assignment and novation, highlighting their similarities and differences.

Assignment refers to the transfer of rights and obligations from one party (the assignor) to another party (the assignee). In an assignment, the assignor remains a party to the original contract, but transfers some or all of their rights and obligations to the assignee. The assignee steps into the shoes of the assignor and assumes the rights and obligations associated with the contract.

One of the key attributes of assignment is that it does not require the consent of the other party to the original contract. The assignor can unilaterally transfer their rights and obligations to the assignee without seeking the consent of the other party. However, the assignor must provide notice to the other party about the assignment, as failure to do so may result in the assignment being ineffective.

Another important aspect of assignment is that it does not extinguish the original contract. The assignor remains liable to the other party for any breaches or obligations that existed prior to the assignment. This means that the assignee can enforce the rights under the original contract against the assignor if necessary.

Furthermore, assignment can be partial or complete. In a partial assignment, the assignor transfers only a portion of their rights and obligations to the assignee, while retaining the rest. In a complete assignment, the assignor transfers all of their rights and obligations to the assignee.

It is worth noting that certain rights and obligations may not be assignable. For example, personal services contracts or contracts that involve personal skill or expertise may not be assignable without the consent of the other party. Additionally, assignment may be prohibited by the terms of the original contract.

Novation, on the other hand, refers to the substitution of a new party for one of the original parties to a contract. In a novation, the original contract is extinguished, and a new contract is formed between the remaining original party and the new party. The new party assumes all the rights and obligations of the departing party, effectively replacing them in the contract.

Unlike assignment, novation requires the consent of all parties involved. The departing party, the remaining original party, and the new party must all agree to the novation and execute a novation agreement. This agreement explicitly states the intention to substitute the original party with the new party and outlines the rights and obligations that will be transferred.

Novation has the effect of releasing the departing party from any further liability or obligations under the original contract. Once the novation is complete, the departing party is no longer bound by the terms of the contract and is relieved of any future obligations. The new party assumes all the rights and obligations as if they were an original party to the contract.

It is important to note that novation is a more complex process compared to assignment. It involves the creation of a new contract and the consent of all parties, which may require additional negotiations and formalities. Novation is often used in situations where a party wants to completely replace an existing party with a new party, such as in mergers and acquisitions or when transferring ownership of a business.

While assignment and novation both involve the transfer of rights and obligations, there are several key differences between the two mechanisms. Let's explore these differences:

Assignment does not require the consent of the other party to the original contract, whereas novation requires the consent of all parties involved. In assignment, the assignor can unilaterally transfer their rights and obligations to the assignee without seeking the consent of the other party. Novation, on the other hand, requires the explicit agreement of all parties to substitute the original party with a new party.

Legal Implications

Assignment does not extinguish the original contract, and the assignor remains liable for any breaches or obligations that existed prior to the assignment. The assignee can enforce the rights under the original contract against the assignor if necessary. In contrast, novation extinguishes the original contract and releases the departing party from any further liability or obligations. The new party assumes all the rights and obligations as if they were an original party to the contract.

Novation is generally more complex compared to assignment. It involves the creation of a new contract and the consent of all parties, which may require additional negotiations and formalities. Assignment, on the other hand, is a simpler process that does not require the creation of a new contract or the consent of the other party to the original contract.

Extent of Transfer

Assignment can be partial or complete, depending on the intention of the assignor. The assignor can transfer only a portion of their rights and obligations to the assignee, while retaining the rest. In a complete assignment, the assignor transfers all of their rights and obligations to the assignee. Novation, on the other hand, involves the complete substitution of a new party for one of the original parties. The new party assumes all the rights and obligations of the departing party.

Prohibited Assignments

While assignment allows for the transfer of most rights and obligations, there may be certain rights and obligations that are not assignable. For example, personal services contracts or contracts that involve personal skill or expertise may not be assignable without the consent of the other party. Additionally, assignment may be prohibited by the terms of the original contract. Novation, on the other hand, does not face the same limitations as assignment, as it involves the creation of a new contract with the consent of all parties.

In conclusion, assignment and novation are two mechanisms used to transfer rights and obligations from one party to another. Assignment involves the transfer of rights and obligations from the assignor to the assignee, while the assignor remains a party to the original contract. Novation, on the other hand, involves the substitution of a new party for one of the original parties, resulting in the creation of a new contract.

While assignment does not require the consent of the other party and does not extinguish the original contract, novation requires the consent of all parties and releases the departing party from any further liability or obligations. Novation is generally more complex compared to assignment, and it allows for the complete substitution of a new party. However, both assignment and novation have their own legal implications and limitations, which should be carefully considered when transferring rights and obligations under a contract.

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What Is Novation?

How novation works, novation vs. assignment.

• Novation FAQs

The Bottom Line

• Corporate Finance

Novation: Definition in Contract Law, Types, Uses, and Example

Investopedia / Julie Bang

Novation is the replacement of one of the parties in an agreement between two parties, with the consent of all three parties involved. To novate is to replace an old obligation with a new one.

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

Key Takeaways

• To novate is to replace an old obligation with a new one.
• In contract law, a novation replaces one of the parties in a two-party agreement with a third party, with the agreement of all three parties.
• In a novate, the original contract is void. The party that drops out has given up its benefits and obligations.
• In the financial markets, using a clearinghouse to vet a transaction between two parties is known as a novation.
• Novation is different than an assignment, where the original party to the agreement retains ultimate responsibility. Therefore, the original contract remains in place.

In legal language, novation is a transfer of both the "benefits and the burdens" of a contract to another party. Contract benefits may be anything. For example, the benefit could be payments for services. The burdens are the obligations taken on to earn the payment—in this example, the services. One party to the contract is willing to forgo the benefits and relinquish the duties.

Canceling a contract can be messy, expensive, and bad for an entity's reputation. Arranging for another party to fulfill the contract on the same terms, with the agreement of all parties, is better business.

Novations are often seen in the construction industry, where subcontractors may be juggling several jobs at once. Contractors may transfer certain jobs to other contractors with the client's consent.

Novations are most frequently used when a business is sold, or a corporation is taken over. The new owner may want to retain the business's contractual obligations, while the other parties want to continue their agreements without interruption. Novations smooth the transition.

Types of Novations

There are three types of novations:

• Standard : This novation occurs when two parties agree that new terms must be added to their contract, resulting in a new one.
• Expromissio : Three parties must be involved in this novation; a transferor, a counterparty, and a transferee. All three must agree to the new terms and make a new contract.
• Delegation : One of the parties in a contract passes their responsibilities to a new party, legally binding that party to the terms of the contract.

A novation is an alternative to the procedure known as an assignment .

In an assignment, one person or business transfers rights or property to another person or business. But the assignment passes along only the benefits, while any obligations remain with the original contract party. Novations pass along both benefits and potential liabilities to the new party.

For example, a sub-lease is an assignment. The original rental contract remains in place. The landlord can hold the primary leaseholder responsible for damage or non-payment by the sub-letter.

Novation gives rights and the obligations to the new party, and the old one walks away. The original contract is nullified.

In property law, novation occurs when a tenant signs a lease over to another party, which assumes both the responsibility for the rent and the liability for any subsequent damages to the property, as indicated in the original lease.

Generally, an assignment and a novation require the approval of all three parties involved.

A sub-lease agreement is usually an assignment, not a novation. The primary leaseholder remains responsible for non-payment or damage.

Novation Uses

Because a novation replaces a contract, it can be used in any business, industry, or market where contracts are used.

Financial Markets

In financial markets, novations are generally used in credit default swaps, options, or futures when contracts are transferred to a derivatives  market clearinghouse. A bilateral transaction is completed through the clearinghouse , which functions as an intermediary.

The sellers transfer the rights to and obligations of their securities to the clearinghouse. The clearinghouse, in turn, sells the securities to the buyers. Both the transferor (the seller) and transferee (the buyer) must agree to the terms of the novation, and the remaining party (the clearinghouse) must consent by a specific deadline. If the remaining party doesn't consent, the transferor and transferee must book a new trade and go through the process again.

Real Estate

Contracts are a part of real estate transactions, so novation is a valuable tool in the industry. If buyers and sellers enter into a contract, novation allows them to change it when issues arise during due diligence, inspection, or closing.

Commercial and residential rental contracts can be changed using novation if tenants or renters experience changes that affect their needs or ability to make payments.

Government Contracting

Federal, state, and local governments find it cheaper and beneficial for the economy to contract specific tasks rather than create an official workforce. Contracts are critical components for private or public companies who win a bid to do work for governments. If the contractor suddenly can't deliver on the contract or other issues prevent it from completing its task, the contractor can ask the government to recognize another party to complete the project.

A novation is not a unilateral contract mechanism. All concerned parties may negotiate the terms until a consensus is reached.

Banks use novation to transfer loans or other debts to different lenders. This typically involves canceling the contract and creating a new one with the exact terms and conditions of the old one.

Example of Novation

Novation can occur between any two parties. Consider the following example—Maria signed a contract with Chris to buy a cryptocurrency for $200. Chris has a contract with Uni for the same type of cryptocurrency for $200. These debt obligations may be simplified through a novation. By agreement of all three parties, a novation agreement is drawn, with a new contract in which Chris transfers the debt and its obligations to Maria. Maria pays Uni $200 in crypto. Chris receives (and pays) nothing.

Novations also allow for revisions of payment terms as long as the parties involved agree. For example, say Uni decided not to accept crypto but wanted cash instead. If Maria agrees, a novation occurs, and new payment terms are entered on a contract.

What Is a Novation?

In novation, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

What Is The Meaning of Novation Agreement?

In novation, the rights and obligations of one party to a two-party contract are transferred to a third party, with the agreement of all three parties.

Is Novation a New Contract?

Yes, because the old contract is invalidated or "extinguished" when the new contract is signed.

In a novation, when all parties agree, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

Novation differs from an assignment, where one party gives up all rights outlined in the contract but remains responsible for fulfilling its terms. The original contract remains in place.

International Swaps and Derivatives Association. " ISDA Novation Protocol ."

General Services Administration. " Subpart 42.12 - Novation and Change-of-Name Agreements ."

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• 13 March 2018
• Commercial Real Estate

Novation and Assignment: Sisters, Not Twins

There’s often, understandably, a bit of uncertainty about whether (and how) a party to a contract can “assign” (transfer) its rights, or pass on its obligations, under that contract, to another person.

In law, the general rule is that only the original parties to the contract can discharge or fulfil the obligations and enforce the rights created under it and nobody else gets a look in. This is called “privity of contract”.

Essentially, novation and assignment are both mechanisms to get around this restriction. However, while the end result is the same, there are some important differences between these two mechanisms.

Under an assignment, one party (the assignor) keeps performing their obligations under the contract, but transfers some or all rights to a third party (the assignee). The parties to the contract remain the same so privity of contract is preserved.

Assignments can be legal or equitable. In order for an assignment to be a legal assignment, the assignment must be agreed in writing, signed by the assignor, and the other party to the contract must be given notice of the assignment. A legal assignment is usually preferable as this allows the assignee to enforce the rights in their own name directly.

If the assignment is an equitable assignment because it does not fit the criteria for a legal assignment (for example, the other party was not given notice of it), the assignee will need to get the assignor to enforce the assigned rights on its behalf.

Contracts often require the consent of the other party before any assignment can take place. Some contracts expressly prohibit assignment. However, even where there is such wording in the contract, there is nothing stopping you from asking the party to consent to the assignment anyway, though you should take care to record any agreement in writing.

The main point to remember is that you cannot assign obligations under a contract to another party – you can only assign your benefits or rights. Even if the assignee agrees that they will take on the obligations under the contract, it is still the assignor who remains responsible for performance of the obligations and liable if they are not. In practice, what often happens is that the assignee does take over the performance of the contractual obligations but simply agrees to indemnify the assignor for any failures in performance.

It is also important to note that some rights may not be legally capable of assignment.

When you novate a contract, the original contract effectively ceases to exist and is replaced with a new contract. The new contract contains exactly the same rights and obligations as the original contract, except that it substitutes one of the original parties (the outgoing party) with a third party (the incoming party).

As you are creating a new contract, technically you need to provide fresh consideration. Usually a simple novation agreement between all the parties will be enough, but, if there is any doubt, the parties may choose to execute the novation as a deed instead, which dispenses with the need for consideration.

The novation agreement (or deed) will specify what happens to the liabilities under the original contract. In a typical novation, the outgoing party would be released from all liabilities and the incoming party would inherit these. However, this is up to the parties to decide; they could even decide that the outgoing party will remain liable for all of the liabilities under the original contract.

Novating the contract will release the outgoing party from any future obligations which may arise. This is a crucial difference between novation and assignment.

Although the novation agreement itself can be simple, the process of getting all the parties to the table to agree and execute might be more complex. The main issue for an outgoing party will be persuading the other original party to sign. The other original party often has concerns about service continuity and may want certain assurances or information about the incoming third party.

Equally, the other original party is not obliged to agree: they can refuse to novate and then sue for breach if the party trying to exit the contract fails to meet its contractual obligations. As they still have this other option, in any novation scenario, the outgoing party is probably in a weaker bargaining position, and the other original party may well use this to their advantage.

About this article

• Subject Novation and Assignment: Sisters, Not Twins
• Expertise Commercial Real Estate
• Published 13 March 2018

Disclaimer This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Novation Contracts: Key Elements, Types, and Legal Framework

Explore the essentials of novation contracts, their types, and the legal framework that governs them, including key differences from assignment agreements.

In the world of contracts and agreements, novation plays a crucial role in ensuring that obligations can be transferred smoothly from one party to another. This legal mechanism is essential for businesses undergoing restructuring, mergers, or acquisitions, as it allows them to maintain continuity without breaching existing contractual terms.

Understanding novation contracts is vital because they offer a structured way to replace an original party with a new one while preserving the integrity of the agreement.

Key Elements of Novation Contracts

At the heart of novation contracts lies the concept of mutual consent. All parties involved—the original party, the new party, and the counterparty—must agree to the substitution. This tripartite agreement ensures that the new party steps into the shoes of the original party, assuming all rights and obligations under the contract. Without this mutual consent, the novation cannot be legally binding, making it a fundamental aspect of the process.

Another significant element is the discharge of the original party from their obligations. Once the novation is executed, the original party is released from any future liabilities related to the contract. This is particularly important in scenarios where the original party may no longer be in a position to fulfill their contractual duties, such as in cases of corporate restructuring or asset sales. The discharge provides a clean break, allowing the original party to move forward without lingering responsibilities.

Documentation is also a critical component. A novation agreement must be meticulously drafted to capture the terms of the substitution, the consent of all parties, and the release of the original party. This document serves as the legal record of the novation and must be executed with the same level of formality as the original contract. Proper documentation ensures that there is no ambiguity about the terms of the novation, thereby preventing potential disputes in the future.

Types of Novation

Novation can take various forms, each tailored to specific circumstances and needs. Understanding these types helps in selecting the appropriate method for transferring contractual obligations. Here, we explore three primary types of novation: Standard Novation, Ab Initio Novation, and Tripartite Agreement.

Standard Novation

Standard novation is the most common form, where an existing contract is transferred from the original party to a new party. This type of novation is typically used in business transactions such as mergers and acquisitions. In a standard novation, the new party assumes all rights and obligations of the original party from the date of the novation agreement. The original contract remains in effect, but the parties to the contract change. This ensures continuity and minimizes disruption to the contractual relationship. For instance, if Company A sells a division to Company B, a standard novation would allow Company B to take over all existing contracts related to that division, ensuring that clients and suppliers experience no interruption in service.

Ab Initio Novation

Ab initio novation, meaning “from the beginning,” involves replacing the original party with a new party as if the new party had been part of the contract from the start. This type of novation is less common and is typically used in more complex legal and financial arrangements. In an ab initio novation, the new party assumes all past, present, and future obligations and rights under the contract. This can be particularly useful in situations where historical continuity is crucial, such as in long-term service agreements or financial instruments. For example, if a long-term lease agreement is novated ab initio, the new tenant would be responsible for all past rent payments and any historical obligations, providing a seamless transition.

Tripartite Agreement

A tripartite agreement involves three parties: the original party, the new party, and the counterparty. This type of novation is often used in complex transactions where the consent of all three parties is necessary to effect the novation. The tripartite agreement clearly outlines the terms of the novation, including the release of the original party and the assumption of obligations by the new party. This type of novation is particularly useful in industries such as construction and finance, where multiple stakeholders may be involved. For instance, in a construction project, a tripartite agreement might be used to transfer the obligations of a subcontractor to a new subcontractor, ensuring that the project continues smoothly without legal complications.

Legal Framework Governing Novation

The legal framework governing novation is rooted in contract law, which varies by jurisdiction but generally adheres to similar principles. At its core, novation requires the mutual consent of all parties involved, a concept enshrined in legal systems worldwide. This consent must be explicit and documented, ensuring that all parties are fully aware of the changes being made to the contractual relationship. The requirement for mutual consent is not merely a formality; it is a safeguard that protects the interests of all parties, ensuring that no party is unfairly disadvantaged by the novation.

Jurisdictions may have specific statutes or case law that further define and regulate the process of novation. For example, in the United Kingdom, the Contracts (Rights of Third Parties) Act 1999 allows third parties to enforce contractual terms under certain conditions, which can intersect with novation agreements. Similarly, in the United States, the Uniform Commercial Code (UCC) provides a framework for commercial transactions, including provisions that can impact novation. Understanding these legal nuances is crucial for drafting effective novation agreements that comply with local laws and regulations.

The role of consideration in novation is another important legal aspect. In many jurisdictions, for a novation to be valid, there must be consideration—something of value exchanged between the parties. This could be a payment, a promise, or another form of benefit. The concept of consideration ensures that the novation is not merely a gratuitous promise but a binding legal agreement. This requirement can sometimes complicate the novation process, particularly in complex commercial transactions where the value exchanged may not be immediately apparent.

Legal precedents also play a significant role in shaping the framework for novation. Courts have ruled on various aspects of novation, providing guidance on issues such as the necessity of explicit consent, the interpretation of novation clauses, and the enforceability of novation agreements. These precedents help to clarify ambiguities and provide a roadmap for future novation agreements. For instance, court rulings have established that implied consent is generally insufficient for novation, emphasizing the need for clear, documented agreement among all parties.

Differences Between Novation and Assignment

While both novation and assignment involve the transfer of contractual rights and obligations, they are fundamentally different processes with distinct legal implications. Novation, as previously discussed, requires the mutual consent of all parties involved and results in the complete substitution of one party for another. This means that the original party is entirely released from the contract, and the new party assumes all rights and obligations as if they were an original signatory.

Assignment, on the other hand, is a more limited transfer mechanism. In an assignment, the assignor transfers their rights under the contract to the assignee, but the assignor remains liable for any obligations. This means that while the assignee can benefit from the contract, the assignor is still responsible for fulfilling any duties or liabilities. For example, if a landlord assigns the right to receive rent payments to a third party, the landlord still retains the responsibility for maintaining the property.

Another key difference lies in the necessity of consent. While novation requires the explicit agreement of all parties, assignment typically does not. The assignor can transfer their rights without needing the consent of the counterparty, unless the contract explicitly prohibits assignment. This makes assignment a more straightforward process but also one that offers less protection to the counterparty, who may find themselves dealing with an unfamiliar party without their input.

Role of Consent in Novation Agreements

Consent is the linchpin of any novation agreement, ensuring that all parties are on the same page regarding the transfer of rights and obligations. This mutual agreement is not just a procedural formality but a substantive requirement that upholds the integrity of the contractual relationship. Without the explicit consent of the original party, the new party, and the counterparty, the novation cannot proceed. This tripartite consent ensures that the new party is fully aware of and willing to assume the responsibilities, and the counterparty is comfortable with the substitution.

The process of obtaining consent can be intricate, often involving negotiations to address any concerns or conditions that the parties may have. For instance, the counterparty might require assurances about the new party’s ability to fulfill the contract’s terms, such as financial stability or technical expertise. These negotiations can be formalized through written agreements, which serve as a record of the consent and the terms under which it was given. This documentation is crucial for legal enforceability, providing clear evidence that all parties agreed to the novation.

In some cases, obtaining consent can be a hurdle, particularly if the counterparty is reluctant to accept the new party. This is where the skill of negotiation and the clarity of the novation agreement come into play. Legal advisors often play a pivotal role in facilitating these discussions, ensuring that the terms are fair and that the consent is genuinely informed. The importance of clear, documented consent cannot be overstated, as it prevents future disputes and provides a solid foundation for the new contractual relationship.

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Novation and assignment

Changing the parties bound to a contract

What is novation, is novation a new contract, what is a deed of novation, why novation can be difficult, when do you use an assignment agreement to transfer a debt or obligation, transfer of a debt, transfer of service contracts.

Novation and assignment are ways for someone to transfer their interest in a contract to someone else.

Whilst the difference between assignment and novation is relatively small, it is an essential one. Assigning when you should novate could leave you in a position of being liable for your original contract when the other party is not liable to perform their obligations.

In contract law the principle of privity of contract means that only the parties to a contract have the obligation to fulfill it and the right to enforce it. Statute law has created a few exceptions but they apply rarely.

The legal concepts of novation and assignment have been developed to overcome the restrictions imposed by the doctrine.

Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of their original counter-party.

Novation in practice

Let us suppose Michael buys a car from Peter, owing him £5,000 as part of the sale price until Peter obtains a certifcate of authenticity.

Michael then sells the car to Fred under the same terms. Michael wants out, but has obligations to both parties.

Michael persuades Peter and Fred to enter into a novation agreement, signed by all three of them, whereby Fred takes over Michael’s obligations to Peter and Fred now deals with Peter in Michael’s place.

Other examples

The seller of a business transfers the contracts with their customers and suppliers to the buyer. A novation process transfers each contract by the mutual agreement of all three parties.

A design and build contractor in the construction industry transfers a construction contract to a new, substitute contractor. A novation agreement is necessary.

A novation agreement is a new contract that 'extinguishes' the old one.

Because it is a new contract, there can be new terms within it, giving additional rights and obligations.

There are times when and why you should use a deed explains exactly when you need to use one. Novation is not among them.

A Deed of Novation is a relic from long ago when lawyers were even more inclined to cloak their knowledge in obscurity.

One of the main purposes in using the deed format is that it provides the necessity for an unconnected witness to sign the document. So it is that much more difficult for one of the parties to say it was forged or signed a year later than the date shown.

But in a novation, there are at least three parties by definition; three parties who are most unlikely to be connected and each of whom has their separate interest. So you can be pretty sure the agreement has not been tampered with. A witness cannot improve on that. So you do not need a deed.

Another reason to use a deed could be when there is no 'consideration', that is when one of the original contracting parties receives no benefit - monetary or otherwise - in return fot the novation. However, in commercial circumstances you could nearly always argue that there is an advantage to each of the parties. The extinction of the old contract or subjectively more favourable terms within the new contract would both count as fair consideration.

Do you need a deed of novation for your situation? The answer is usually no, as an agreement is fine.

The exception to the rule is that if the original contract was signed as a deed, you need to use a deed to novate it. Real property transaction are by deed. That includes a consent to assign a lease, which has three parties. There are special reasons for that.

There are other examples too, which are more obscure.

When a contract is novated, the other (original) contracting party must be left in the same position as they were in prior to the novation being made.

Novation requires the agreement of all three parties. While obtaining the agreement of the transferor and transferee is easy, obtaining the agreement of the other original party can be more difficult:

The other original party may not understand the benefit to them of having the original contract novated and require extra information about the process that is time consuming to provide.

They may need extra assurance to be persuaded that they won’t be worse off as a result of the novation (especially common where there is a transfer of service contracts between suppliers).

It is possible that they could play up to delay the transfer and squeeze extra concessions from you.

The only way to transfer your rights or obligations is by an agreement signed by all three parties.

But what happens if you are a service provider selling your business with tens of thousands of customers? You can hardly ask every one of them to sign up to their own separate novation.

In practice, a well drawn original agreement will contain a provision which permits the service provider to assign (transfer its contract) without the permission of the customer.

But what happens if it does not?

In practice what happens is that the buyer 'takes a flyer'. The deal is done in the hope that the customers stay with the new owner.

Maybe the buyer obtains an indemnity from the seller to cover their loss if many leave. Maybe the buyer will write to the customers to encourage them to stay. Maybe the customers simply make the next payment and thereby confirm acceptance in law.

In each of those cases, the acquirer will be safe because the customers remain (or become) bound to the terms of the original contract.

Net Lawman offers an assignment agreement to cover that exact situation, together with a draft letter of the sort that might convince customers to stay with the new owner.

The other situation in which assignment is used is where the new party trusts the original party assigning the contract. For example, a subsidiary company may assign contractual obligations to a parent company confident that the parent will uphold the contract.

A construction company is a subsidary in a group. It is working in partnership with another business on several projects to build houses. The other business is a minor partner in the deal. The partnership has run out of money and the smaller partner is unable to inject any more funds. The parent business is unwilling to have its subsidiary fund the remainder of the projects by itself.

A solution may be for the parent to pay both its subsidiary and the third party for the construction contracts to be assigned to it (in other words, buy the contractual rights from the partnership). The assignment provisions would give the parent the obligation to finish the project, which it may be able to do without the third party.

Assignment transfers benefits only

Even if the assignee promises to take on the liability of the assignor to the third parties, the assignor remains personally liable if they fail to do so. An obligation to a third party cannot be assigned without their consent.

When assignment can invalidate your contract

Terms in an original contract can restrict or prohibit assignments. This is particularly common in construction contracts but can apply in any agreement. If you attempt to assign a contract that cannot be assigned, you risk invalidating the original contract.

Personal obligations and assignment

Be particularly careful of an assignment if your obligations can only be performed personally. A good example would be sale of a hair dressing business. Quite apart from the risk of the clients leaving, the actual forward appointments could be interpreted as contracts with the seller, even though they would have no way to fulfill them because they have sold the business.

Buying the right document

Very generally, if you are unsure whether you should assign or novate, we recommend that you novate and obtain consent of all parties. We offer a number of novation and assignment agreement templates for different situations.

For example: You borrow from a lender and you later want to transfer the debt to someone else (maybe a friend, a business partner or a the buyer of your business) so that they become liable to repay the lender instead of you. In this situation you should use an agreement that novates the debt .

This is a common consideration when a business is sold and outstanding debts of the business are transferred to the new owner (perhaps loans of money but maybe also loans of goods for sale).

Alternatively, you could novate in order to change who should pay back a personal loan between individuals.

Transfer of a right to receive the repayment of a debt

For example: You make a loan to someone (it could be money or goods) and later you want to change who receives the repayment (an agreement to change who the creditor is ).

The transaction might relate to the sale of a business where the buyer takes on the assets of the seller (the loans to other parties), or when factoring debt.

For example: You provide a service to someone and you want to transfer the obligation of providing that service to another person or company.

Again, a common use for a service contract novation agreement is where a business is sold and the buyer takes on the service contracts of the seller. The service could be in any industry, from a fixed period gardening contract to an on-going IT or website maintenance. Novation changes who is providing the service.

Transfer of an architectural or building contract

For example: You buy a building or property development that is still under construction and you want the existing contractor to continue work despite the original contract being between the contractor and the seller.

In this situation you should use a novation agreement for a building contract .

Our standard assignment agreement can be used for most assignments (exceptions given below). It is not specific to circumstances.

Assignment of a business lease

If you wish to transfer a commercial property lease to another business tenant during the fixed term, Net Lawman offers an agreement to assign a lease .

We have an article specifically about assigning a business lease that may be useful further reading.

It is not advisable to assign a residential tenancy agreement. We would suggest that you cancel the original agreement and draw up a new agreement with the new tenants.

Assignment of copyright

We have  number of assignment agreements for intellectual property rights .

They are effectively sale or transfer agreements where some rights are retained by the seller (such as to buyback the assigned work, or for the work only to be used in certain locations).

They relate to IP in media (such as a film or a music score) and to inventions.

Assignment of a life insurance policy or endowment policy

These agreements allows you to transfer the rights to receive payments from a life insurance policy or endowment policy. We offer both a deed of assignment of a policy on separation or divorce and a deed of assignment to gift or sell the policy to someone else .

Assignment and collateral warranties in the construction industry

Probably the most common use of assignment in the construction industry today is in relation to collateral warranties.

The collateral warranties given by consultants, contractors and sub-contractors in construction contracts 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 and obligations in favour of an assignee.

So 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 (who would usually be the assignor) has sold the building or created a full-repairing lease, then their right would be to nominal damages only. This is one situation where you should definitely use a deed of novation.

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Out-Law Analysis 10 min. read

Construction law terms: assignment and novation

14 Jul 2023, 12:44 pm

The terms ‘assignment’ and ‘novation’ are sometimes used interchangeably in relation to construction projects, but they are, in fact, very different.

While both involve bringing in a new party to the contractual arrangements, they have very distinct practical consequences. This guide examines the difference between both terms explains important differences, looks at how these differences have been illustrated in recent case law and offers some practical takeaways.

It is important to note that the ‘assignment’ of one party’s interest in a contract to another party is only partial, because the process only transfers the benefit of the first party’s interest. Assignment does not also transfer the first party’s obligations under that contract to the second party.

For example, the employer (Party A) under a building contract might assign the benefit of a collateral warranty granted to it by the contractor (Party B) or a subcontractor, to the purchaser of the development (Party C). That assignment does not transfer the burden of any of the employer’s obligations – they remain the same.

Another example showing how an assignment can only transfer the benefit of a contract, not the burden, under a building contract would be:

• the developer’s rights to have the works constructed or to sue the building contractor if the works are defective, are benefits – so can be assigned;
• the developer’s obligation to pay the contract price is a burden – so cannot be assigned.

The assignment of the benefit of a contract to Party C does not replace the parties to the original contract. However, after the assignment, Party C is entitled to the benefit of the contract and to enforce its rights against Party B. Party A cannot do so – as they have assigned those benefits onto Party C. However, because the burden has not transferred, Party A will remain liable to Party B for the performance of all obligations under the contract.

Read more in our construction law terms series

• Construction law terms: general and liquidated damages
• Construction law terms: design development and design change
• Construction law terms: termination at common law and under contract
• Construction law terms: claims under contract vs breach of contract claims
• Construction law terms: contractual notices and condition precedent notices
• Construction law terms: set off, abatement and counterclaims

The ordinary position is that an assignment will transfer the benefit of accrued and also of future rights. It is possible to agree something different – for example the transfer of future rights only – but clear and express words are required.

It is essential for parties that are considering assigning the benefit of a contract to check the terms of the contract first. This is because many contracts exclude or qualify the right to assignment, such as by limiting the number of times it can be assigned. By way of example, clause 7.1 of the standard form JCT Design and Build Contract 2016 states: “neither the Employer nor the Contractor shall without the consent of the other assign this Contract or any rights thereunder”.

In practice, however, this clause is very often amended, so parties must make sure to check the terms, and any schedule of amendments, carefully. 

One common amendment adds wording that the consent of the other party to assignment “shall not be unreasonably withheld or delayed”. While there is surprisingly little case law on what this means in practice, there is some authority to suggest that it means, at least, that the party required to provide consent must act honestly and in good faith, and must not withhold consent arbitrarily, capriciously or unreasonably.

Lastly, assignment can be statutory – sometimes referred to as ‘legal assignment’ – or equitable.  Statutory assignment must comply with the requirements of s.136 of the 1925 Law of Property Act, which includes a requirement to notify the other party to the contract (Party B) of the assignment in writing. If the assignment does not comply with the formalities in the Act, it will be an equitable assignment. 

The most pertinent difference between an equitable and statutory assignment is that the party (Party C) to whom the benefit is assigned cannot enforce in its own name and must join Party A in any action. This prevents Party B from being sued by Party C in circumstances where Party B has had no notice of the earlier assignment. 

If you want to transfer the burden of a contract as well as the benefit under it, you have to novate. In effect this creates a new contract between the two new parties and releases one of the parties from the contractual chain. The key requirement of novation is that it needs consent of all three parties involved. If Parties A and B have a contract between them, but Party A wishes to substitute Party C in its place then Parties A, B and C must all consent to this. 

Because the consent of all parties is required it will typically be documented in a tripartite agreement, signed by the novating party, the party to whom the contract is being novated and the third party. The agreement will in practice commonly be executed as a deed, otherwise some form of consideration must be provided by the party to whom the contract is being novated. 

If the parties do all consent to novation, the effect is that the original contract between Party A and B is extinguished and is replaced by a new one between Party B and C, which duplicates the rights and obligations of those under the original contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

In the context of a construction project, novation commonly occurs in design and build projects where the employer may engage consultants in the pre-construction design process. The building contract between the employer and contractor will often provide for the novation of these design consultants to the contractor. 

More generally, novation frequently occurs as a result of a company group restructuring or sale. On large infrastructure projects you might also see the novation of contracts to a special purpose vehicle (SPV) company that is set up specifically for the project. 

Key differences between assignment and novation

Case law involving assignment and novation

A good starting point is the Commercial Court case of The Argo Fund Ltd v Essar Steel Ltd, in which the judge summarised the four main differences between assignment and novation.

• A novation requires the consent of all three parties involved. By contrast, Party A can assign without the consent of either Party B or Party C – unless the contract states otherwise.
• A novation involves the termination of one contract and the creation of a new one in its place. In the case of an assignment Party A’s existing contractual rights are transferred to Party B, but the contract remains the same and Party A remains a party to it so far as its obligations are concerned.
• A novation involves the transfer of both benefits and obligations to the new party, whereas an assignment concerns only the transfer of benefits.
• Novation involves the termination of a contract and the creation of a new one so consideration is required, unless a party uses a deed which is generally enforceable without consideration. By contrast, assignment can be completed without the need for consideration.

Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd

There are a number of cases where it has not been entirely clear whether a contract has been assigned or novated. A recent example is the 2020 ruling in the dispute between Energy Works (Hull) Ltd and MW High Tech Projects UK Ltd. The employer, Energy Works, engaged MW High Tech (MW) as a contractor. MW engaged Outotec as subcontractor.

The project did not go as planned and Energy Works terminated the main contract, which provided that, on termination, MW must assign its subcontracts to Energy Works. MW did so, but there was confusion over whether it retained the benefit of any accrued or future rights under the Outotec subcontract. 

MW’s primary case was that the assignment of the subcontract only assigned future rights, not accrued rights. It argued, therefore, that it could claim for these past breaches. Its alternative case was that if accrued and future rights were transferred, then properly construed the assignment also transferred accrued and future liabilities and therefore took effect as a novation. 

On the primary case, the judge found that the natural meaning of the words “ assign the sub-contract ” was to assign the benefit of all rights under that contract, both accrued and future. She explained that it is possible to retain accrued rights, which could form the basis of a claim, and assign future rights only, however clear words are needed and were absent here.

On the alternative case the judge disagreed that the transfer took effect as a novation. The parties called the transfer an assignment which, whilst not conclusive, was consistent with the wider factual background that suggested there was no intention for the subcontract to terminate and be replaced with a new one – as would occur with a novation.

The practical effect of this assignment was that MW had transferred away its right to pursue Outotec for damages, including any argument that its delay was what caused the termination. However, in a ‘double whammy’, MW remained liable to pay Outotec for works done under the subcontract and for any further works Outotec performed after the assignment.

At the same time, MW could not claim payment in respect of those works until the final account’s reckoning – which would not be until 90 days after eventual completion. MW remained liable to Energy Works for liquidated damages, replacement contractor costs and any defects. 

Practical implications

Assignment and novation are different ways of transferring an interest under a contract, but with very different practical effects; the terms should not be used interchangeably. Parties should be especially careful in relation to post-termination assignment or novation terms.

They should also be clear what they are trying to do from the outset and consider how it has to be documented – by notice of assignment or deed of novation. Parties should check the terms of their contract. Is there a prohibition or other restriction on assignment? They must ensure they comply with them. For a legal assignment, parties must follow the requirements of s.136 of the 1925 Law of Property Act. This includes a requirement to notify contract counterparties. 

If a party is assigning a contract, or is to be obliged to do so post termination, they should consider carefully whether they want to assign accrued and future rights. If they wish to do something different – for example by retaining accrued rights so they have a route to claim against a subcontractor – then clear words are needed.

Co-written by Callum Miller of Pinsent Masons.

Editor's note 03/04/24:  This article was updated to properly reflect the outcome of the Energy Works v MW High Tech case. We regret the error.

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What is the Difference Between an Assignment and a Novation in the UK?

By Edward Carruthers

Updated on 21 November 2022 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

• What is an Assignment? 

What is a Novation?

Two key differences between an assignment and a novation, key takeaways, frequently asked questions.

As a business owner, you may encounter occasions where you must transfer certain beneficial rights or obligations to a third party. For example, your business may stop performing a service and wish to transfer the rights conveyed to you under a particular contract to another party. An assignment or a novation can help you do this. However, they act in very different ways and have differing requirements. This article will explain the main differences between an assignment and a novation and the circumstances where you may wish to use them. 

What is an Assignment? 

Under the terms of a standard contractual agreement, you or your business partners will receive rights or benefits. You can transfer the right to receive these benefits through an assignment to anyone who is not part of the original agreement. Assignments are made through an assignment deed, which will set out the benefits you wish to bestow on another person. It is worth noting that you can only assign your own rights. You cannot assign any other person’s rights conveyed in a contract.

Once you (the assignor) transfer your rights to the third party (the assignee), they can enjoy the benefits of the contract you provided.

Assignments are common in construction contracts where a property developer may enter into a building contract with a contractor. The developer can transfer their rights under that contract to anyone buying the property. Those rights then allow the purchaser to demand the contractor perform their duties under the original arrangement. Otherwise, they can make a claim against the contractor for a breach of contract. 

Novations are slightly more complicated than assignments. They transfer both the rights and obligations that you have under a contract. You may use a novation to leave a contract you no longer wish to be a party to and find a replacement. For example, if you stop trading in a specific service or line of goods, you can use a novation deed to remove yourself from a contract to provide these services. The novation deed will then allow you to substitute yourself for someone else willing to do this work.

Technically, a novation cancels the original contract you held with your business partner and creates a duplicate contract. In that duplicate, a third party will take the rights, benefits, and obligations conveyed to you from that agreement.

As the party leaving the contract, you will let go of all your rights to your benefits under the original contract. You will also no longer need to perform your contractual duties. It is worth noting that the burden of finding a replacement party for the novation often falls on the person leaving the contract. Therefore, to set up a novation, you must find the replacement yourself. However, you should be aware that any party involved in the existing contract can veto your decision to bring in a replacement if they are unsatisfied.

Novations often happen where businesses are bought and sold or where debt transactions occur. For example, when a company borrows money from a lender and wants to transfer the obligations to repay the debt to a third party. They can transfer these obligations via a novation. 

As discussed above, the main difference between an assignment and a novation is that a novation transfers your obligations and rights under that contract. By contrast, an assignment transfers only your rights and benefits.

But there are other differences between the two that business owners must be aware of.

1. Novations Require the Consent of All Parties

An assignment does not require the consent of all parties to the contract to transfer the rights. Additionally, you do not necessarily have to notify the other parties to an agreement that an assignment is taking place. However, as a commercial courtesy, it is wise to notify your business partners that you intend to assign your rights to a third party. It is also essential to ensure no contractual terms prohibit you from transferring a benefit to a third party. Doing say may lead to breaching the contract, and you will be liable for damages. 

With novations, you must obtain consent from every party to a contract before transferring your contractual obligations and rights. This is because you are transferring your duties to perform obligations to a third party. In addition, as the other businesses involved in a contract rely on the performance of these obligations, they have a right to be notified of the novation arrangements. They must also provide their consent to these arrangements. Therefore, a novation deed must be signed and approved by every party to that original agreement, including the party exiting the contract.

2. Novations Require Consideration

Consideration is an essential element of contract law. It is a legal term for payment of value in exchange for a promise. To have a legally binding contract, you must have some form of consideration passing between parties. For example, in a delivery contract, one party must pay another party for shipping a set of goods. Without that consideration passing between parties, you cannot have a legally binding contract, and you can take action against your business partner for breach of contract. 

Novation deeds require you to exchange consideration before terminating the original contract. They also require consideration when making the new novation contract. On the other hand, as assignments do not involve the termination of a contract, you do not have to show that parties to the contract exchanged consideration.

Assignments and novations differ in three important ways. For instance, assignments transfer rights to contractual benefits to third parties, while novations transfer rights and obligations under a contract to a third party. Additionally, novations require the consent of all parties to the contract. On the other hand, you can make assignments without the consent of all parties. Finally, novations require consideration. 

If you need help transferring your rights, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents.  Call us today on 0808 196 8584 or visit our membership page .

Assignments are where business owners can transfer a right or benefit given to them under a contractual arrangement to a third party. 

A novation transfers both a business owner’s rights and obligations under a contract to a third party. 

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Contracts: The critical difference between Assignment and Novation

Introduction

An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the “Lidl Contract”). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the “ Trustee Contract”) and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones’ obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones’ obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don’t take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants’ contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164.

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Assignment and Novation: Spot the Difference 12 November 2020

The english technology and construction court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an epc contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits..

In doing so, Mrs Justice O’Farrell has emphasised established principles on assignment and novation, and the clear conceptual distinction between them. While this decision affirms existing authority, it also highlights the inherent risks for construction contractors in step-in assignment arrangements.

"This decision shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position."

This preliminary issues judgment in the matter of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others¹ , is the latest in a long series of decisions surrounding the Energy Works plant, a fluidised bed gasification energy-from-waste power plant in Hull². The defendant, MW High Tech Projects UK Ltd (“MW”), was engaged as the main contractor by the claimant and employer, Energy Works (Hull) Ltd (“EWHL”), under an EPC contract entered into in November 2015. Through a sub-contract, MW engaged Outotec (USA) Inc (“Outotec”) to supply key elements for the construction of the plant.

By March 2019, issues had arisen with the project. EWHL terminated the main contract for contractor default and, pursuant to a term in the EPC contract, asked MW to assign to it MW’s sub-contract with Outotec. The sub-contract permitted assignment, but MW and EWHL were unable to agree a deed of assignment. Ultimately, MW wrote to EWHL and Outotec, notifying them both that it was assigning the sub-contract to EWHL. EWHL subsequently brought £133m proceedings against MW, seeking compensation for the cost of defects and delay in completion of the works. The defendant disputed the grounds of the termination, denied EWHL’s claims, and sought to pass on any liability to Outotec through an additional claim under the sub-contract. Outotec disputed MW’s entitlement to bring the additional claim on the grounds that MW no longer had any rights under the sub-contract, because those rights had been assigned to EWHL.

The parties accepted that a valid transfer in respect of the sub-contract had taken place. However, MW maintained that the assignment only transferred future rights under the sub-contract and that all accrued rights – which would include the right to sue Outotec for any failure to perform in accordance with the sub-contract occurring prior to the assignment – remained with MW. In the alternative, MW argued that the transfer had been intended as a novation such that all rights and liabilities had been transferred. As a secondary point, MW also claimed eligibility for a contribution from Outotec under the Civil Liability (Contribution) Act 1978 for their alleged partial liability³.

An assignment is a transfer of a right from one party to another. Usually this is the transfer by one party of its rights and remedies, under a contract with a counterparty, to a third party. However, importantly, the assignor remains liable for any obligations it owes under the contract. As an example, Party A can assign to Party C its right to receive goods under a contract with Party B, but it will remain liable to pay Party B for those goods. Section 136 of the Law of Property Act 1926 requires a valid statutory assignment to be absolute, in writing, and on notice to the contractual counterparty.

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"In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights."

In this case, the precise scope of the transferred rights and the purported assignment of contractual obligations were in issue. Mrs Justice O’Farrell looked to the House of Lords’ decision in Linden Gardens⁴ to set out three relevant principles on assignment:

• Subject to any express contractual restrictions, a party to a contract can assign the benefit of a contract, but not the burden, without the consent of the other party to the contract;
• In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights; and
• It is possible to assign only future rights under a contract (i.e. so that the assignor retains any rights which have already accrued at the date of the assignment), but clear words are needed to give effect to such an intention.

Hence, in relation to MW’s first argument, it is theoretically possible to separate future and accrued rights for assignment, but this can only be achieved through “careful and intricate drafting, spelling out the parties’ intentions”. The judge held that, since such wording was absent here, MW had transferred all its rights, both accrued and future, to EWHL, including its right to sue Outotec.

Whereas assignment only transfers a party’s rights under a contract, novation transfers both a party’s rights and its obligations . Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the original, unless expressly agreed otherwise by the parties.

Another key difference from assignment is that novation requires the consent of all parties involved, i.e. the transferring party, the counterparty, and the incoming party. With assignment, the transferring party is only required to notify its counterparty of the assignment. Consent to a novation can be given when the original contract is first entered into. However, when giving consent to a future novation, the parties must be clear what the terms of the new contract will be.

"Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.”"

A novation need not be in writing. However, the desire to show that all parties have given the required consent, the use of deeds of novation to avoid questions of consideration, and the use of novation to transfer ‘key’ contracts, particularly in asset purchase transactions, means that they often do take written form. A properly drafted novation agreement will usually make clear whether the outgoing party remains responsible for liabilities accrued prior to the transfer, or whether these become the incoming party’s problem.

As with any contractual agreement, the words used by the parties are key. Mrs Justice O’Farrell found that the use of the words “assign the sub-contract” were a strong indication that in this case the transfer was intended to be an assignment, and not a novation.

This decision reaffirms the established principles of assignment and novation and the distinction between them. It also shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position. Here, it was found that MW had transferred away its right to pursue Outotec for damages under the sub-contract, but MW remained liable to EWHL under the EPC contract. As a result, EWHL had the right to pursue either or both of MW and Outotec for losses arising from defects in the Outotec equipment, but where it chose to pursue only MW, MW had no contractual means of recovering from Outotec any sums it had to pay to EWHL. Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.” A contractor in MW’s position can still seek from a sub-contractor a contribution in respect of its liability to the employer under the Civil Liability (Contribution) Act 1978 (as the judge confirmed MW was entitled to do in this case). However, the wording of the Act is very specific, and it may not always be possible to pass down a contractual chain all, or any, of a party’s liability.

Commercially, contractors often assume some risk of liability to the employer without the prospect of recovery from a sub-contractor, such as where the sub-contractor becomes insolvent, or where the sub-contract for some reason cannot be negotiated and agreed on back-to-back terms with the EPC contract. However, contractors need to consider carefully the ramifications of provisions allowing the transfer of sub-contracts to parties further up a contractual chain and take steps to ensure such provisions reflect any agreement as to the allocation of risk on a project.

This article was authored by London Dispute Resolution Co-Head and Partner Rebecca Williams , Senior Associate Mark McAllister-Jones and Gerard Rhodes , a trainee solicitor in the London office.

[1] [2020] EWHC 2537 (TCC)

[2] See, for example, the decisions in Premier Engineering (Lincoln) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2484, reported in our article here , Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) and C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331, reported in our article here .

[3] The Civil Liability (Contribution) Act 1978 allows that “ any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage whether jointly with him or otherwise .”

[4] Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

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Government Contract Novation Vs Assignment of Contract & FAR 42.1204 Novation Clause

All should be aware that the contracting officer does not have to approve every assignment of contract transactions under the FAR 42.1204 contract novation clause .

• Avoid the costly mistake of assuming that the government must approve all novations.
• If done improperly, contractors can be found in breach of contract terms and can even face suspension or debarment .

Novation Agreement FAR 42.1204 Definition

In federal government contracting,  developing a novation can be somewhat unique because depending on the facts of each case, the original parties may still be responsible for performance to the government.  Whereas, in the commercial sector, the contract novation definition means that a new party to the contract essential substitutes the original party. In other words in the commercial sector, the original party’s obligation is discharged and substitution of an original party to a contract with a new party, or substitution of an original contract with a new contract.

Federal Government Contract Novation vs Assignment of Contract

Business Asset Purchase Agreement and Contract Assignment  Clause Issues

What is the difference between assignment and novation? Simply executing a business asset purchase agreement and a signed novation contact agreement  when buying or selling a business is not the end of the legal analysis when there is a government contract involved.  The contracting officer must approve the assignment of government contracts and or novation agreement . Your novation letter should address critical issues that answer the contracting officer’s concerns about the risk of performance. Novating government contracts is all about minimizing the risk to the agency.

In one case , SBA OHA ignored the argument that when novating a contract, its purchase and sale contract with the buyer had the legal effect of divesting the seller of any control over the current contracts. In that case, there was no formally approved novation agreement FAR contract. As a result, the whole transaction went to waste because the parties lacked a full understanding of the rules. A Government contract may not be automatically transferred to a third party. See 41 USC 15.

• In government contracting, if there is a performance problem, for example in construction, and a termination for default is an issue, or the surety is called upon for obligations under a performance bond, then the original party may not necessarily be discharged.
• Assignment of government contracts decisions, when there is a purchase and sale agreement involving a company that has existing government contracts, should be met with caution.

On the issue of contract novation vs assignment , although the FAR 42.1204 assignment novation clause allows the buying and selling parties to execute a novation vs assignment agreement due to an asset purchase or stock sale, companies should still assess legal issues related to violation of SBA small business size standards. 

• Companies should always keep the agency involved from the beginning of the process to the end.

41 USC 6305 – Contract Assignment Clause – Prohibition on transfer of contract and certain allowable assignments

Under the federal contract assignment clauses, when there are business sales that involve government contracts, the purchase and sale agreement suggests that the contracts would be transferred to the buyer either through a business asset purchase agreement sale or stock sale.

However, the reality is that although FAR 42.1204 allows for a novation of contract agreement, the contracting officer is not obligated to approve it.  A federal government contracting agency, only when it determines it to be in its interest, may accept a third party as the successor in interest when the third party’s interest in the contract arises out of the transfer of all of the contractor’s assets or the entire portion of the contractor’s assets involved in performing the contract. FAR 42.1204 (a). See also How Do Federal Government Contractors Deal With COVID-19 Problems ?

• The contracting officer is not forced to approve the  FAR novation clause language if the transaction is not in the government’s best interest.
• If the government declines to novate a contract, the original contractor is still responsible for performance. FAR 42.1204 (c) contract novation clause.
• If the assignment of contract is not recognized by the contracting officer, and the original contractor does not perform, the original contractor can be terminated for default.

Potential SBA Size Standard Violations

When assessing government novation contract law rules, the SBA found in one case that since there was no approved assignment of the contract through an approved government novation agreement, the two businesses were deemed affiliated through the identity of interest rule.

On appeal, OHA found that since there was no formal contract novation, the seller was still responsible for the contract performance, and both companies were in the same line of business. In that case, the SBA also found that there was no clear fracture between the buyer and seller. The two businesses were therefore also affiliated with the newly organized concern rule.

Help With Government Contracting Companies for Sale

Oftentimes, buyers and sellers do not understand the complex regulations involved with government contracting companies for sale. Not only are novation agreements a potential issue, the due diligence needed and the ability to address buyers’ other business relationships that can impact their small business size status can be a huge problem. Contact Theodore Watson at 720.941.7200 for immediate help.

Legal Issues Regarding Novation Vs Assignment 

Assignment vs novation. Know the difference: There are several legal issues that arise under federal contract novation agreement FAR law during the purchase and business sales, assignment and transfer of federal contracts when government contracts are involved.  Common issues that occur with the assignment novation clause terms include: (1) whether the seller is simply trying to sell the contract with no real assets, (2) how to structure the asset purchase agreement and whether wait for contracting officer novation approval first and (3) to what degree does the contracting officer have to approve the novation. The first step is to be proactive in the early stages of the asset purchase or stock sale process.

Having the right contract clauses in the sales agreement is critical in the event that the contracting officer does not approve the contract novation. Other issues with novating a contract include the buyer maintaining its small business status in the event of recertification or option year decisions. Find out more about Signs of Being Under Investigation (Federal)

For additional questions about what is the difference between assignment and novation for federal contractors buying and selling a business that includes an assignment and FAR novation agreement or assignment of contract issues under FAR 42.1204 novation clause, or need help with government contracting companies for sale, call Watson & Associates’ government  contract novation law lawyers for immediate help. Call 1-866-601-5518. FREE INITIAL CONSULTATION.

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Assignment and Novation

What are assignment and novation clauses.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are: assignment, for the transfer of benefits; and novation, for the transfer of rights/benefits and obligations. Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment and novation clauses

Assignment, novation and other dealings boilerplate clauses, non-assignment clauses, withholding consent to an assignment.

The two main legal tools for the transfer of the rights and/or obligations under a contract to another party are:

• assignment, for the transfer of benefits; and
• novation, for the transfer of rights/benefits and obligations

Each has unique features that must be taken into account when deciding which is the preferred option.

Assignment clauses

A contracting party at common law has a general right to assign its rights without any consent or approval from the other party (unless by its very nature the right is personal). An assignment clause may be included in an agreement to exclude or limit this common law right. In order for the assignment of rights by one party to not be exercised unilaterally without the knowledge of the other party, it is common for contracts to include a provision that a party can only assign its rights under the contract with the consent of the other party.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings (either alone or by joining the assignor depending in whether the assignment is legal or equitable) against the other contracting party to enforce its rights. The assignee does not become a party to the contract with the promisor. As the burden or obligations of the contract cannot be assigned, the assignor remains liable post assignment to perform any part of the contract that has not yet been performed.

Novation clauses

By executing a novation, a party can transfer both its rights/benefits and obligations. At common law, the obligations under a contract can only be novated with the consent of all original contracting parties, as well as the new contracting parties. This is because the novation extinguishes the old contract by creating a new contract.

A novation clause will usually provide that a party cannot novate a contract without the prior written consent of existing parties. Including a novation clause in an agreement is designed to prevent oral consent to a novation, or consent being inferred from a continuing party’s conduct. However, a court will look to the substance of what has occurred, and such a clause is not effective in all situations.

It is possible for a novation clause to prospectively authorise a novation to be made by another party unilaterally to a party chosen by the novating party. The courts will give effect to a novation made in this manner provided it is authorised by the proper construction of the original contract.

Option 1 – Assignment, novation and other dealings – consent required

A party must not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of each other party [which consent is not to be unreasonably withheld/which consent may be withheld at the absolute discretion of the party from whom consent is sought].

Option 2 – Assignment, novation and other dealings – specifies circumstances in which consent can reasonably be withheld

(a)   [ Insert name of Party A ] may not assign or novate this [deed/agreement] or otherwise deal with the benefit of it or a right under it, or purport to do so, without the prior written consent of [ insert name of Party B ], which consent is not to be unreasonably withheld . 

(b) [ Insert name of Party A ] acknowledges that it will be reasonable for [ insert name of Party B ] to withhold its consent under this clause if:

(i)      [ Insert name of Party B ] is not satisfied with the ability of the proposed assignee to perform [ insert name of Party A ]’s obligations under this [deed/agreement];

(ii)      [ Insert name of Party B ] is not satisfied with the proposed assignee’s financial standing or reputation;

(iii)     the proposed assignee is a competitor of [ insert name of Party B ]; or

(iv)       [ Insert name of Party B ] is in dispute with the proposed assignee .

Click  here  for information on how to use this boilerplate clause.

A non-assignment clause prevents a party or parties from assigning the benefit of the contract. Non-assignment clauses are generally effective if they have been clearly drafted.

Contracts commonly provide for assignment with the consent of the other party. Such provisions usually provide that consent must not be unreasonably withheld and, where there is no such proviso, one may be implied. Accordingly, if it is intended that a party may withhold its consent to an assignment for any reason whatsoever (including on unreasonable grounds) clear contractual language should be used.

A purported assignment that contravenes such contractual restriction may constitute a breach of contract and result in an ineffective assignment.

The ‘reasonableness’ of withholding consent to an assignment is assessed by an objective standard and given a broad and common sense meaning.

The relevant factors in assessing reasonableness will differ in each case and heavily depend on the particular circumstances, including the nature and object of the specific contract and the purpose of the non-assignment clause.  Relevant factors may include any defaults in obligations under the contract and the solvency and identity of the assignee.

A party’s actions in withholding consent will generally be considered unreasonable if the grounds relied upon to support the withholding are:

• extraneous or disassociated from the subject matter of the contract;
• materially inconsistent with any provision(s) of the contract; or
• based on collateral or improper considerations.

It is advisable, where withholding consent to an assignment, to clearly set out the reasons for withholding consent in a letter to the other party.

Contracts: The Critical Difference Between Assignment and Novation

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Introduction

An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. The distinction between assignment and novation was addressed recently in the case of Davies v Jones (2009), whereby the court considered whether a deed of assignment of the rights under a contract could also transfer a positive contractual obligation, which in this instance included the obligation to pay.

Mr Jones (the first defendant) contracted to sell Lidl (the second defendant) a freehold property (the "Lidl Contract"). At that time, the freehold was vested in the claimants as trustees of a retired benefit scheme. Mr Jones contracted to buy the land from the claimants (the " Trustee Contract") and assigned his right, title and interest to the Trustee Contract to Lidl by way of a deed of assignment.

Clause 18 of the Trustee Contract permitted Mr Jones, as purchaser, to retain £100,000 from the purchase monies payable to the claimants until the outstanding works (ground clearance and site preparation) had been completed. Following completion of the works Mr Jones was entitled to retain one half of the proper costs from the retention and release the balance to the claimants. There was a similar clause in the Lidl Contract, which allowed Lidl to retain the proper costs from the retention. Importantly, although similar, under the Lidl Contract Lidl was entitled to retain the whole cost of carrying out the works as against only half in the Trustee Contract.

Lidl retained the sum of £100,000 from the money due by Mr Jones to the claimants on completion of the contract. Once the works were completed Mr Jones failed to pay the claimant the retention monies claiming that the proper cost of the works was over £200,000.

The claimants argued that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones' obligations under the Trustee Contract. Therefore, the question considered by the court was whether Lidl was bound to observe the terms of the Trustee Contract and in particular clause 18, given that benefit of the contract had been assigned to them.

The court held that the benefit which passed to Lidl by way of the deed of assignment did not require Lidl to perform the obligations of Mr Jones under the Trustee Contract. The assignment did not impose any burden on Lidl. The only person who clause 18 of the Trustee Contract was binding on was Mr Jones. The transfer to Lidl could not impose on Lidl the obligation to perform Mr Jones' obligations and these therefore remained with Mr Jones. This reaffirms the principle that when you take an assignment of a contract, you don't take on the burden (except in limited circumstances where enjoyment of the benefit is conditional on complying with some formality). Therefore, if an owner assigns a building contract to a purchaser of land and the building is still under construction, the obligation to pay the contractor remains with the original owner and does not pass to the new owner.

Assignment and novation in the Construction Industry

Both assignment and novation are common within the construction industry and careful consideration is required as to which mechanism is suitable. Assignments are frequently used in relation to collateral warranties, whereby the benefit of a contract is transferred to a third party. Likewise, an assignment of rights to a third party with an interest in a project may be suitable when the Employer still needs to fulfil certain obligations under the contract, for example, where works are still in progress. A novation is appropriate where the original contracting party wants the obligations under the contract to rest with a third party. This is commonly seen in a design and build scenario whereby the Employer novates the consultants' contracts to the Contractor, so that the benefit and burden of the appointments are transferred, and the Employer benefits from a single point of responsibility in the form of the Contractor.

If the intention is that the assignee is to accept both the benefit and burden of a contract, it is not normally sufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. In these instances a novation would be a preferable method of transferring obligations, and this allows for both the benefit and burden to be transferred to the new party and leaves no residual liability with the transferor.

Reference: Davies v Jones [2009] EWCA Civ 1164 .

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 07/06/2010.

Corporate/Commercial Law

United kingdom.

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Assignment, novation and construction contracts - What is your objective?

Consider a not too hypothetical situation where the parties to a construction project (employer, contractor and sub-contractor) enter into a Deed of Assignment intending that the employer, having lost confidence in the contractor, would directly engage the sub-contractor to complete the sub-contract works. But what if no assignment has taken place? What are the terms of the contract under which the sub-contractor carries out the works for the employer?

Potential risks with assignment

In construction projects, main contractors often assign the benefit of their key sub-contracts to the employer in the event of contractor default and consequent termination of the main contract. The employer can then enforce the rights in the sub-contract against the sub-contractor, including rectification of the works and the performance of particular obligations.

However, there are potential risks associated with assignment in these situations as the Technology and Construction Court’s decision in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd demonstrated. We discussed this decision in Assigning a sub-contract on termination: which rights is the contractor giving up? In this case, the nature of the assignment meant that the main contractor could not pursue claims made by the employer against its sub-contractor under the sub-contract. This limited the main contractor’s ability to ‘pass on’ any liability it had under the main contract to the sub-contractor.

But what if the Deed of Assignment does not take effect as an assignment?

Assignment v novation

Both assignment and novation are forms of transferring an interest under a contract from one party to another. However, they are very different and in their effect. An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden. In contrast, a novation will transfer both the benefit and the burden of a contract from one party to another. A novation creates a new contractual relationship - a ‘new’ contract is entered into.

Another key difference with novation is that the consent of all parties concerned must be obtained, which is why novation is almost always effected through a tripartite agreement. In the case of an assignment, it is not always necessary to obtain consent, subject to what the specific terms of the contract provide.

When deciding whether to assign or novate, parties should consider (i) whether there is in fact a burden to novate, (ii) whether the novatee will be willing to take on the burden, (iii) whether all parties will consent to the novation and indeed enter into the agreement. If there is no burden under the contract to transfer, then an assignment is likely to be the most appropriate way to transfer the interests.

Is the Deed for an assignment or a novation?

Although a document may be labelled a Deed of Assignment, if it has references to the transfer of ‘ responsibilities and obligations ’ and is a tripartite agreement these are characteristic of a novation as opposed to an assignment.

A key issue in such circumstances is to ascertain whether making use of the words ‘ assigning ’ and ‘ assignment ’ actually affects the characteristics of the document.

There has been some consideration of this characterisation issue by the courts. In the case of Burdana v Leeds Teaching Hospitals NHS Trust [2017] EWCA Civ 1980, by majority the Court of Appeal decided that on the facts of the case, although the Deed of Assignment in question referred to an ‘ assignment ’ of the benefit and burden, on proper analysis there was indeed a novation.

Furthermore, in the case of Langston Group Corporation v Cardiff City FC [2008] EWHC 535, Briggs J made it evident that even though the variation agreement in question did not use the word ‘ novation ’ and did not describe itself as such, the circumstances and effect of the agreement was indeed a novation and a new contract had been created.

It may be the case that even if a document does not describe itself as a novation, yet has the key characteristics of one, then as a matter of interpretation the courts would accept that the document takes effect as a novation.

Key characteristics of a novation

If entering into a document that purports to be a Deed of Assignment, tread carefully as it may well take effect as a novation, particularly if the following characteristics are present:

• It is a tripartite agreement;
• All the parties give their consent;
• The novator has been released from its obligations;
• There has been an acceptance of the terms of the novation on the part of the novatee and the substituted party; and
• There is a vesting of remedies.

What is your objective?

Although a document may well be labelled as an assignment, it may have the characteristics of and take effect as novation. Parties need to be cautious and consider what they want to achieve when assessing whether to assign rights or to novate them along with obligations.

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Assignment, novation and construction contracts - What is your objective?

Consider a not too hypothetical situation where the parties to a construction project (employer, contractor and sub-contractor) enter into a Deed of Assignment intending that the employer, having lost confidence in the contractor, would directly engage the sub-contractor to complete the sub-contract works. But what if no assignment has taken place? What are the terms of the contract under which the sub-contractor carries out the works for the employer?

Potential risks with assignment

In construction projects, main contractors often assign the benefit of their key sub-contracts to the employer in the event of contractor default and consequent termination of the main contract. The employer can then enforce the rights in the sub-contract against the sub-contractor, including rectification of the works and the performance of particular obligations.

However, there are potential risks associated with assignment in these situations as the Technology and Construction Court’s decision in Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd demonstrated. We discussed this decision in Assigning a sub-contract on termination: which rights is the contractor giving up? In this case, the nature of the assignment meant that the main contractor could not pursue claims made by the employer against its sub-contractor under the sub-contract. This limited the main contractor’s ability to ‘pass on’ any liability it had under the main contract to the sub-contractor.

But what if the Deed of Assignment does not take effect as an assignment?

Assignment v novation

Both assignment and novation are forms of transferring an interest under a contract from one party to another. However, they are very different and in their effect. An assignment transfers the benefit of a contract from one party to another, but only the benefit, not the burden. In contrast, a novation will transfer both the benefit and the burden of a contract from one party to another. A novation creates a new contractual relationship - a ‘new’ contract is entered into.

Another key difference with novation is that the consent of all parties concerned must be obtained, which is why novation is almost always effected through a tripartite agreement. In the case of an assignment, it is not always necessary to obtain consent, subject to what the specific terms of the contract provide.

When deciding whether to assign or novate, parties should consider (i) whether there is in fact a burden to novate, (ii) whether the novatee will be willing to take on the burden, (iii) whether all parties will consent to the novation and indeed enter into the agreement. If there is no burden under the contract to transfer, then an assignment is likely to be the most appropriate way to transfer the interests.

Is the Deed for an assignment or a novation?

Although a document may be labelled a Deed of Assignment, if it has references to the transfer of ‘ responsibilities and obligations ’ and is a tripartite agreement these are characteristic of a novation as opposed to an assignment.

A key issue in such circumstances is to ascertain whether making use of the words ‘ assigning ’ and ‘ assignment ’ actually affects the characteristics of the document.

There has been some consideration of this characterisation issue by the courts. In the case of Burdana v Leeds Teaching Hospitals NHS Trust [2017] EWCA Civ 1980, by majority the Court of Appeal decided that on the facts of the case, although the Deed of Assignment in question referred to an ‘ assignment ’ of the benefit and burden, on proper analysis there was indeed a novation.

Furthermore, in the case of Langston Group Corporation v Cardiff City FC [2008] EWHC 535, Briggs J made it evident that even though the variation agreement in question did not use the word ‘ novation ’ and did not describe itself as such, the circumstances and effect of the agreement was indeed a novation and a new contract had been created.

It may be the case that even if a document does not describe itself as a novation, yet has the key characteristics of one, then as a matter of interpretation the courts would accept that the document takes effect as a novation.

Key characteristics of a novation

If entering into a document that purports to be a Deed of Assignment, tread carefully as it may well take effect as a novation, particularly if the following characteristics are present:

• It is a tripartite agreement;
• All the parties give their consent;
• The novator has been released from its obligations;
• There has been an acceptance of the terms of the novation on the part of the novatee and the substituted party; and
• There is a vesting of remedies.

What is your objective?

Although a document may well be labelled as an assignment, it may have the characteristics of and take effect as novation. Parties need to be cautious and consider what they want to achieve when assessing whether to assign rights or to novate them along with obligations.

This article was written by Anna Sowerby and Eveline Strecker. For more information, please contact Anna  or your usual Charles Russell Speechlys contact.

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Guidance: Contract Modifications (HTML)

Updated 3 September 2024

© Crown copyright 2024

This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: [email protected] .

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This publication is available at https://www.gov.uk/government/publications/procurement-act-2023-guidance-documents-procure-phase/guidance-contract-modifications-html

What are contract modifications?

1. Following the award of a contract, changes (referred to as modifications in the Procurement Act 2023 (Act)) may need to be made to that contract to ensure it can be successfully fulfilled, as demands and circumstances change throughout its lifetime. The Act gives contracting authorities legal certainty when making modifications, setting out ten grounds in total on which public contracts or ‘convertible contracts’ (see paragraphs 37-39 below) may be modified during their term, provided the relevant requirements are met. If a modification cannot be justified on at least      one of the grounds, the modification is not permitted and a new procurement must be carried out if the contracting authority wishes to implement the subject-matter of the modification.

2. Modifications to below-threshold contracts (unless they are convertible contracts) and light touch contracts do not need to be justified on one of the ten grounds; they may be freely modified under the Act. Except where expressly set out, this guidance applies to public contracts only and not below-threshold contracts.

What is the legal framework that governs contract modifications?

3. Sections 74-77 and Schedule 8 of the Act and regulation 40 regulate contract modifications. 

4. Section 74(1) sets out the circumstances under which public contracts or convertible contracts may be modified. Contracting authorities may modify a public contract or a convertible contract if the modification:

a. is a ‘permitted modification’ under one of the eight grounds set out in Schedule 8 (section 74(1)(a)); or

b. is not a ‘substantial modification’ as described in section 74(3) (section 74(1)(b)) (a modification on this ground is described in this guidance as ‘non-substantial’ modifications); or

c. is a ‘below-threshold modification’ as described in section 74(4) (section 74(1)(c)).

5. Section 74 also expressly permits contracting authorities to modify light touch contracts.

6. Section 75 provides that before modifying a contract, contracting authorities must publish a contract change notice, unless an exemption applies. The information that must be included in a contract change notice is set out in regulation 40.

7. Section 76 sets out the rules contracting authorities must follow if they choose to enter into a voluntary standstill period (see paragraphs 50-57 below) after publishing a contract change notice.

8. Section 77 sets out a second transparency requirement. If a modification is made that requires the publication of a contract change notice and the modification is to a contract with a value greater than £5 million (including the value of the modification itself), the contracting authority must publish a copy of the modification or a copy of the contract as modified. Some contracts are exempt from this requirement (either expressly or by operation of section 77), as set out in the table in paragraph 40 below.

What has changed?

9. To give contracting authorities greater flexibility to deal with the challenges of managing a contract successfully, there are four new modification grounds in the Act. These are: urgency and the protection of life; materialisation of a known risk; and two new grounds specific to defence authority contracts. Four grounds that were available under the Public Contract Regulations 2015 (PCR), Utilities Contracts Regulations 2016 (UCR) and Concessions Contract Regulations 2016 (CCR)* have been retained but updated, to give contracting authorities greater certainty when using them.

• See regulation 72 of the PCR, regulation 88 of the UCR and regulation 43 of the CCR.  The Defence and Security Public Contracts Regulations 2011 do not contain specific provisions on contract modification; in practice regulation 16 was used to modify contracts.

10. The four grounds retained from the previous legislation are: where the modification is provided for in the contract, where the modification has arisen due to unforeseeable circumstances, where the modification is for additional goods, services or works provided for in the contract and where the modification is to enable the transfer of the contract on corporate restructuring.

11. Overall, greater flexibility to make contract modifications is balanced by far greater transparency under the Act. The requirements to publish contract change notices and modifications to contracts valued at over £5 million are significant changes from the previous legislation. They are changes that will give interested parties visibility over the modifications made (including the cost of those modifications) during the life of a contract.

12. Other changes include the introduction of a convertible contract and changes to the way the value of a contract is calculated when making modifications (as set out at paragraph 16).

Key points and policy intent

The modification grounds.

13. Modifications to public and convertible contracts can only be made if at least one of the ten grounds set out in section 74 and Schedule 8 of the Act applies. Sections 74(1)(b) and 74(1)(c) may be considered to be more appropriate to more minor amendments, but the Act does not prohibit minor amendments being made under Schedule 8 and an amendment under section 74(1)(b) or 74(1)(c) may be significant; for example an amendment to a works contracts under section 74(1)(c) may amount to a fairly significant amendment, given the value of the works threshold. The modification grounds are summarised in the table below:

** Section 7(7) defines a defence authority contract as a defence and security contract awarded by a defence authority. Section 7(5) and regulation 46 provide that a defence authority is the Secretary of State for Defence, AWE plc, the National Crime Agency and the Oil and Pipelines Agency.

14. More than one ground may apply to a particular modification. For example, a modification may be permissible under section 74(1)(a) on more than one of the grounds set out in Schedule 8 or may meet the criteria for a non-substantial modification under section 74(1(b) and also be permissible under Schedule 8. For example, a modification that is of low value and involves minimal scope changes may be required to deal with unforeseeable circumstances and therefore meet the criteria for both a non-substantial modification (under section 74(1)(b)) and the ‘unforeseeable circumstances’ ground in Schedule 4, paragraph 8. Note, however, that this is not the case for below-threshold modifications. A modification cannot be classed as a below-threshold modification if it could be made under another ground i.e. if it meets the criteria for a non-substantial modification or if a ground in Schedule 8 applies (section 74(4)(d)).

15. The Act prohibits (at section 74(7)) contracting authorities from combining a modification that is not permitted by the Act with one that is permitted in order to make the non-permitted modification. For example, a contracting authority should not make repeated small below-threshold modifications to a contract in order to purchase additional goods, services or works when those modifications could reasonably have been made as a single (larger) modification but that single modification would have been over the threshold set out in section 74(4)(a).

16. Where a reference is made to the ‘estimated value of the contract’ in the contract modification grounds, this means the estimated value of the contract at the time it is valued - i.e. the estimated value immediately before the modification is made (see section 4).

Use of the grounds in sections 74(1)(b) and (1)(c)

17. When making changes to a contract, contracting authorities should select the ground that is most appropriate for the changes they wish to make, and, as set out at paragraph 14 above, in some (but not all) cases more than one ground may apply.

18. The non-substantial and below-threshold grounds in section 74(1)(b) and (c) have some common features in that both set limits on any increase or decrease in contract term or value (respectively) and on changes in scope. The term ‘increase or decrease’ in the meaning of non-substantial and below-threshold modifications refers to modifications that reduce the duration or value of a contract, as well as modifications that increase the duration or value. There are differences, however, in how changes to the value or contract term are calculated (see paragraphs 20 and 24 below).

The non-substantial ground

19. The effect of section 74(1)(b) means that contracting authorities may amend a contract in any way provided this does not amount to a substantial modification as described in section 74(3).

20. One of the restrictions in section 74(3) relates to the term of the contract. If using the non-substantial ground to increase or decrease the duration of a contract, the increase or reduction must amount to 10% or less of the maximum duration provided for when the contract was awarded. To note, the maximum duration provided for includes any extensions to the contract term provided for in the original contract.

21. The contracting authority may have flexibility to modify the duration of the contract above 10% using other grounds, rather than 74(3) in the Act. For example, if a contracting authority wishes to extend a 5 year contract by an additional year not provided for in the original contract (a 20% increase in duration), but the modification does not increase the estimated value of the contract by more than 10%, then the below-threshold ground may be available as a ground on which to make the modification. Alternatively, one of the grounds in Schedule 8 may be available, depending on the situation. Contracting authorities should note that, when relying on the non-substantial ground, the maximum (10%) change to the duration of the contract (if relevant) is based on the original maximum duration provided for in the contract, not the maximum duration provided for immediately prior to the modification (i.e. ignoring any previous modifications that have increased the duration beyond the maximum originally provided for).

22. A modification on the non-substantial ground is also only permitted if the modification would not materially change the scope of the contract or materially change the ‘economic balance’ of the contract in favour of the supplier. Section 74(5) provides that the reference to a material change to the scope means a change to the type of goods, services or works to be supplied under the contract that was not already provided for in the contract.

23. Whether there is a material change in the economic balance in favour of the supplier is concerned with whether the supplier is put in a better place under the contract that materially benefits the supplier economically and should be assessed by reference to the contractual bargain agreed between the contracting authority and the supplier in the context of the whole contract. Each modification will need to be considered on its own facts, but additional goods, services or works to be provided at the same price as that agreed for the original goods, services or works, for example, may not, in the particular circumstances, materially change the economic balance in favour of the supplier. However, a modification that resulted in an increase in the supplier’s profit under the contract from 8% to 16%, or which transferred ownership of intellectual property rights to the supplier, where those rights had value, or repeated modifications that resulted in the purchase of a significant amount of additional goods, services or works over a period of time would, for example, be likely to materially change the economic balance in favour of the supplier.

The below-threshold ground

24. Section 74(4) provides that a below-threshold modification is only permitted if it would not increase or decrease the estimated value of the contract by more than 10% in case of a contract for goods or services or 15% in case of a contract for works. The total value of all below-threshold modifications must also be less than the threshold amount for the type of contract. This means that contracting authorities may only be able to make a limited number of below-threshold modifications. For example, in the case of a goods contract, a number of below-threshold modifications could be made, but the total value of those modifications must not exceed the threshold for goods contracts in Schedule 1 of the Act (£139,688***)

*** The thresholds in this guidance are the current thresholds. Schedule 1 of the Act will be updated when it comes into force to include these thresholds.

25. As with a non-substantial modification, a below-threshold modification must not materially change the scope of the contract and, as set out at paragraph 14 above, the below-threshold modification must not be permissible under section 74(1)(a) (Schedule 8) or section 74(1)(b) (non-substantial modification).

Use of the grounds in Schedule 8

Modification is provided for in the contract.

26. Schedule 8, paragraph 1 permits a modification if it is unambiguously provided for as an option in the original contract and original tender or transparency notice and the modification would not change the overall nature of the contract. It is important that as much information as possible is provided about the potential modification to ensure that the ground can be relied upon.

Modification is due to urgency and the protection of life, etc

27. Schedule 8, paragraphs 2-3 permit a modification only if the purpose of the modification (for example, to respond to an emergency event) could, alternatively, be achieved if the contracting authority made a direct award (of a separate contract) under section 41, Schedule 5, paragraph 13 (urgency) of the Act or regulations made under section 42 (direct award to protect life, etc.). (Further information on these specific direct award justifications can be found in the guidance on direct award.) This ground enables contracting authorities to act swiftly and efficiently in extraordinary circumstances to adapt to urgent requirements. It may be useful where the circumstances require a rapid response and it is quicker and/or better value to modify an existing contract than directly award a new contract. Modifications made on this ground are not capped, so contracting authorities have sufficient flexibility to procure what is necessary in such circumstances.

Modification has arisen due to unforeseeable circumstances

28. Schedule 8, paragraph 4 permits a modification if the circumstances giving rise to the modification could not reasonably have been foreseen by the contracting authority before the contract was awarded, the modification would not change the overall nature of the contract and the modification would not increase the estimated value of the contract by more than 50%.

Modification is due to materialisation of a known risk

29. Schedule 8, paragraphs 5-7 permit a modification where it is to deal with a known risk which materialises during the life of the contract and allows contracting authorities to better manage potential risks in their procurements that otherwise may have resulted in legal uncertainty or an impact on delivery. The Act defines a known risk as a risk which the contracting authority considers could jeopardise the satisfactory performance of the contract but could not, due to its nature, be addressed in the contract from the outset. The risk must have been identified in the tender notice or transparency notice for the award of the contract, which means it must have been identified before the award of the contract. Paragraph 5 provides that the modification is permitted only if the known risk did not materialise due to any act or omission of the contracting authority or the supplier and the existence of the risk means that the contract cannot be performed to the satisfaction of the contracting authority. The modification must go no further than is necessary and it must be in the public’s interest to modify the contract, rather than award a new contract. In addition, the modification must not increase the estimated value of the contract by more than 50%.

30. For example, if, due to emerging cyber threats, a contracting authority needs to ask its supplier to make changes to the software system it provides to enable the system to operate safely and adequately protect personal information stored on the system, the contracting authority could modify the contract to include this requirement, provided the specific risk of emerging cyber threats was identified and detailed in the relevant notice and the other requirements of Schedule 8, paragraphs 5-7 are met.

31. Contracting authorities should be specific and highly selective when identifying known risks; the ground is not intended to capture all risks that may emerge during the lifetime of a contract.

Modification is for additional goods, services or works

32. Schedule 8, paragraph 8 permits a modification if: it is for the supply of goods, services or works in addition to those already provided for in the contract; and using a different supplier would result in the supply of goods, services or works that are different from, or incompatible with, those already provided for in the contract; and the contracting authority considers that this would result in disproportionate technical difficulties in operation or maintenance or other significant inconvenience and the substantial duplication of costs for the authority. In addition, the modification must not increase the estimated value of the contract by more than 50%.

Modification is to enable the transfer of a contract on corporate restructuring

33. Schedule 8, paragraph 9 provides that a novation or assignment (or in Scotland, an assignation) of a public contract to a supplier that is not an excluded supplier is a permitted modification if it is required following a corporate restructuring or similar circumstance. A corporate restructuring could include sale of a business as part of a planned strategy, or one that has been required following the insolvency of the supplier. There is no intention for this ground to be narrower than in the previous legislation.

Modification to defence authority contracts

34. The two grounds which are available to modify defence authority contracts are available to defence authorities, in addition to the other grounds in the Act. A modification to a defence authority contract is permitted to:

a. ensure the contracting authority is able to keep up with developments in technology or prevent or mitigate any adverse effect of such developments; or

b. ensure the continuous provision of goods, services or works where that is necessary to ensure the Armed Forces maintain their operational capabilities, effectiveness, readiness, safety, security or logistical capabilities.

Modification of frameworks, call-off contracts and dynamic markets

35. If a framework, a call-off contract under a framework or contract awarded under a dynamic market is a public contract or a convertible contract, the contract modification provisions in the Act apply; this includes those relating to the publication of contract change notices and the publication of modifications (see below for publication requirements).

36. However, there are some points that are specific to frameworks and call-off contracts:

a. with regard to frameworks, if a contracting authority wishes to modify a framework to extend the term beyond the timeframe set out under section 47(1) ** of the Act, then it would, in addition to satisfying one of the permitted grounds in section 74(1), also need to satisfy the test in section 47(2). See the guidance on frameworks;

** Which provides that the maximum term of a framework is either four years, or, in the case of defence and security or utilities frameworks, eight years.

b. with regard to call-off contracts:

i. if a contracting authority wishes to rely on the ‘materialisation of a known risk’ ground (Schedule 8 paragraphs 5-7) to make modifications to call-off contracts, it must sufficiently identify the specific risks that may require a modification in the tender notice or transparency notice for the framework (because these notices are not used when awarding a call-off contract).

For example, in order for call-off contracts under a framework for the maintenance of school buildings to be modified to deal with RAAC crumbling concrete being discovered in a site survey, the tender notice or transparency notice for the framework would need to specify that the risk may arise in particular call-off contracts. 

For this reason, this modification ground in relation to call-off contracts is likely to be of greater use where frameworks are designed to be relatively specific in their nature and have a particular group of contracting authorities in mind;

ii. similarly, if a contracting authority wishes to rely on the ‘provided for in the contract ground’ (Schedule 8, paragraph 1) to make a modification that is unambiguously provided for in a call-off contract as awarded, it must provide sufficient information about the possible modification in the tender notice or transparency notice for the framework.

For example, the tender notice or transparency notice for a framework for road upkeep and resurfacing could set out that possible modifications that enable their duration to be extended or ancillary road maintenance services to be purchased may be unambiguously provided for in the call-off contracts.

Convertible contracts

37. The Act provides for the concept of a ‘convertible contract’ at section 74(1). A convertible contract is a below-threshold contract that, as a result of the modification, will become a public contract.

38. Because a convertible contract will become a public contract after modification, it is treated as a public contract prior to the relevant modification being made for the purposes of section 74 (and section 75 and section 77 dealing with contract change notices and the publication of modifications (see paragraphs 40-49 below). This means that a modification that would result in a below-threshold contract becoming a public contract can only be made if the modification is permitted under section 74(1).

39. After modification, the contract will be subject to all of the provisions in the Act that apply to public contracts, for example, the various notice requirements, rather than just the provisions in Part 6 of the Act that are specific to below-threshold contracts. Contracting authorities should note that when a convertible contract becomes a public contract, there is no requirement to set and assess performance against key performance indicators (KPIs) for that contract even if, once modified, the contract is valued at over £5 million. This is because the requirement to set key performance indicators under section 52(1) arises before a public contract is entered into. See guidance on KPIs and guidance on contract performance notices.

Transparency requirements

40. The first transparency requirement (set out in section 75) is that before modifying a public contract or a convertible contract, a contracting authority must publish a contract change notice on the central digital platform unless one of the following exemptions apply:

***** See section 83(5) and the definition of a ‘relevant notice’ in section 83(8).

41. Section 75(4) and (5) prohibit contracting authorities from dividing modifications into smaller ones to fit below the publication threshold and avoid publishing a contract change notice.

42. The second publication requirement (set out in section 77) is that the contracting authority must publish a copy of the contract as modified or the modification itself where it has made a ‘qualifying modifications’.

43. A qualifying modification is a modification to a contract which:

a. requires the publication of a contract change notice under section 75; and

b. modifies, or results in, a public contract with an estimated value of more than £5 million (including the value of the modification).

44. The copy of the contract as modified or the modification must be published within 90 days of the qualifying modification being made (beginning with the day on which it was made). The central digital platform requires that these are published as an attachment to the contract change notice. 

45. A contracting authority could choose to attach agreed drafts of the modification or modified contract to the contract change notice at the time the notice is published. Where this is the case, the final modification made or modified contract must be attached to the contract change notice before the end of the 90 day deadline in section 77(1).

46. Where a modification or modified contract is published, it may be redacted in accordance with section 94 (General exemptions from duties to publish or disclose information). See the guidance on publication of information for further information.

47. Where the value of the modification takes the total value of the contract over the £5 million publication threshold, the contracting authority will not have been required to publish a copy of the original contract under section 53(3) of the Act. In this instance, contracting authorities are encouraged to publish the contract as modified, rather than just the modification, in order to enable interested parties to better understand the modification.

48. To note, as contract change notices are not required to be published prior to modifying the contracts referred to in section 75(6) (see the table at paragraph 40 above), this means any modifications to those contracts are not qualifying modifications and therefore the requirement to publish the modification or a copy of the modified contract does not apply.

49. The requirement to publish a qualifying modification does not apply to a modification to a contract that was awarded by a devolved Welsh authority, unless it was awarded as part of a procurement under a reserved procurement arrangement (the latter would be the case if, for example, a devolved Welsh authority is awarding a call-off contract over £5 million under a framework established by a reserved contracting authority, such as the Cabinet Office) or was awarded as part of a procurement under a devolved Welsh procurement arrangement, for example where a contracting authority that is not a devolved Welsh authority is awarding a contract under a framework or dynamic market established by a devolved Welsh contracting authority. Devolved Welsh authorities should refer to the Welsh-specific guidance.

Voluntary standstill

50. Contracting authorities may choose to implement a ‘voluntary standstill period’ prior to making a contract modification.

51. A standstill period in the context of a contract modification is the period of time between publication of the contract change notice and making the modification. The standstill period gives suppliers and other interested parties the opportunity to consider the proposed modification and validity of the grounds relied on. It is important to note that during this period contracting authorities are only prohibited from making the modification; delivery of the extant contract continues. For more information on standstill, see guidance on contract award notices and standstill.

52. Where a voluntary standstill applies, section 76 provides that:

a. the contracting authority may not modify a public contract or a convertible contract before the end of the standstill period stated in the contract change notice; and 

b. the standstill period must not be less than a period of eight working days, beginning with the day on which the contract change notice is published.

53. Where there is no requirement to publish a contract change notice prior to modifying the contract, but the contracting authority wishes to implement a voluntary standstill period, a contract change notice must be published. This is because it is the contract change notice that formally triggers the start of the voluntary standstill period.

54. Contracting authorities must state in the contract change notice whether a voluntary standstill period applies, and if so, the duration of that period (noting the minimum period in section 76(2) (see above)) and set out the date that the contract will be modified, and the date that the modification will have effect. By applying a voluntary standstill period, contracting authorities can protect themselves from risk of the modification being set aside or post-contractual damages being awarded if there is a successful legal challenge.

55. A contract change notice can be published and a voluntary standstill period commenced whilst negotiations on the modification are ongoing, provided that the contracting authority includes all of the information required by the regulations in the contract change notice (this might not be feasible if, for example, the change to the value or term of the contract are part of that negotiation). When a contract change notice can be published early, this provides the added benefit that the contracting authority will not need to pause the process of making the modification in order to observe the standstill period.

56. If proceedings are commenced to challenge a modification and notified to the contracting authority during the standstill period, the ‘automatic suspension’ will apply and the contracting authority will be unable to modify the contract until the claim has been resolved or the suspension lifted by the court. Publishing the contract change notice as early as possible means any challenges can be managed at a less disruptive stage and potentially resolved outside of formal court processes.

57. The nature of the modification (for example, if it needs to be completed urgently) may justify accepting the risk of the modification being set aside and not implementing a voluntary standstill period. Therefore, whilst a voluntary standstill period is best practice in most circumstances, there may be other factors to consider. It is up to individual contracting authorities to make a risk-based decision whether to apply it or not.

What notices are linked to this aspect of the Act?

58. The key notice relating to contract modifications is the contract change notice which informs suppliers and other interested parties that a contract is to be modified.

59. The information that must be included in a contract change notice is set out in regulation 40 and includes the applicable ground(s) for modification, an explanation of why the modification falls within the specific ground(s) used, and details of any changes to the value and term of the contract resulting from the modification. To note it is not the intention that legally a ground does not or cannot apply because it is not included in the contract change notice.

60. If the modification is made under Schedule 8, paragraph 9 and the contract is being transferred to a different supplier as a result of a corporate restructure, the details of any new supplier as well as the details of any supplier that is no longer party to the contract must also be included in the contract change notice.

61. Following the publication of a contract change notice and subsequent modification of the contract, the next notice that a contracting authority may be required to publish will be one of the following:

a. contract change notice: a contracting authority must publish a contract change notice each time it modifies the contract again (unless an exemption applies);

b. contract performance notice: multiple contract performance notices may be required to be published during the lifetime of the contract;

c. contract termination notice: publication of this notice will inform interested parties that a contract has been concluded. Private utilities contracts and user choice contracts are exempt from this requirement.

What other guidance is of particular relevance to this topic area?

Guidance on valuation of contracts

Guidance on competitive tendering procedures

Guidance on direct award

Guidance on contract award notices and standstill

Guidance on publication of information

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