Who Keeps the Risk? Assignment vs Novation

Construction contracts do not always remain with the parties who originally signed them. A developer may transfer a project to another entity, a financier may require rights over project payments, or a principal may need a replacement contractor to take over existing subcontracts following termination.

Parties often refer to these situations broadly as “transferring the contract”. However, assignment and novation have different legal effects, requirements, and consequences for risk allocation.

If the parties use the wrong form of transfer, or fail to document it correctly, the original party may remain liable, the incoming party may be unable to enforce important rights, and existing claims may be unintentionally released.

What is an assignment?

An assignment transfers an existing contractual right from one party, known as the assignor, to another party, known as the assignee.

The underlying contract remains in place. The assignor remains a party to it and must continue performing its obligations. The assignee does not become a party to the contract or assume the assignor’s obligations, but it may enforce the right that has been assigned.

For example, a principal may assign the benefit of construction warranties to a purchaser of a completed development. The purchaser may enforce those warranties if defects emerge, but it does not assume the principal’s obligations under the construction contract.

As a general rule, assignment does not require the consent of the party responsible for providing the relevant benefit. However, the contract may prohibit assignment without prior written consent or impose conditions on when an assignment may occur.

The Australian Standard general conditions of contract AS 4000-1997, for example, provides that neither party may assign the contract, a payment, or another right, benefit, or interest without the other party’s prior written approval.

Parties should therefore review the contract before attempting an assignment and comply with any approval, notice, or other procedural requirements.

What is a novation?

A novation replaces an existing contract with a new contract, usually on substantially the same terms, and substitutes one party for another.

Unlike assignment, novation can transfer both rights and obligations. The incoming party steps into the contractual relationship, while the outgoing party is released to the extent provided by the novation terms.

Novation requires the consent of all relevant parties because they agree to discharge the original contractual arrangement and enter into a replacement arrangement. Parties commonly document this through a tripartite deed of novation between the outgoing party, the incoming party, and the continuing party.

A common example of novation in construction arises when a principal engages design consultants to prepare a preliminary design before appointing a design and construct contractor. Once the contractor is appointed, the parties may novate the consultant agreements from the principal to the contractor.

In this scenario, the consultant is the continuing party, the principal is the outgoing party, and the contractor is the incoming party. Following the novation, the consultant performs its remaining services for the contractor, and the contractor assumes responsibility for managing the consultant and completing the design.

Novation may also arise following termination of a head contract. The principal may seek to novate key subcontracts to itself or to a replacement head contractor so that existing scope, pricing, and delivery arrangements can continue.

The key differences

A practical example which highlights the difference between assignment and novation can be seen when a subcontractor sells its business during a project.

If it assigns only its right to receive payment to the incoming purchaser, the original subcontractor must still complete the works and remains liable for defects, delay, and other breaches.

If the parties intend the purchaser to complete the works, receive future payments, manage defects, and assume the subcontractor’s remaining obligations, they will generally need a novation.

Describing that arrangement as an assignment will not necessarily transfer the obligations or release the original subcontractor.

The following table summarises the main differences:

The distinction affects who must perform the remaining work, who can enforce contractual rights, whether the outgoing party remains liable, and whether existing claims survive the transfer.

What makes an assignment effective?

An assignment is valid only if there is a clear intention to transfer an identifiable proprietary right. The contract must also permit the assignment, and the parties must satisfy any applicable contractual conditions.

Giving notice also helps establish that the party responsible for the obligation knows who is entitled to enforce the assigned right or receive the relevant payment.

The assignment documents should clearly identify the right being transferred, the effective date, and whether the assignment includes rights arising from earlier events.

This is particularly important where a principal assigns the benefit of construction warranties to a purchaser or another project entity. Broad wording may transfer the future benefit of those warranties as well as the right to pursue claims for earlier breaches.

If the parties intend to limit the assignment to future breaches, specified warranties, or particular rights, the deed of assignment and any consent should state those limitations expressly.

What makes a novation effective?

A valid novation requires:

• an agreement to discharge the original contract and release the outgoing party;
• the consent of all parties; and
• a new contract substituted for the original contract.

Consent may be given when the novation occurs or in advance under the original contract. Any consent given in advance should clearly authorise both the substitution of the party and the transfer of rights and obligations. Construction contracts sometimes include advance consent to a future novation, particularly where the parties anticipate the transfer of consultant agreements or subcontracts.

Although parties may establish novation through several related agreements, a tripartite deed usually provides the clearest evidence of their intentions. The deed can identify the effective date, the obligations assumed by the incoming party, the treatment of existing claims, and the extent to which the outgoing party retains liability.

Novation: what happens to accrued rights and liabilities?

A novation should expressly address the treatment of rights, claims, and liabilities that arose before the novation date.

Releasing an outgoing party from future performance does not necessarily release it from liability for earlier events. The outcome depends on the wording of the deed and whether the relevant right or claim had fully accrued before the original contract was discharged.

A right may not be fully accrued if the contract requires further steps before it can be enforced. For example, a claim for liquidated damages may depend on an assessment or certification under the contract. If that step has not occurred before the novation takes effect, a general clause preserving “accrued rights” may not preserve the claim.

The deed should therefore identify the rights, claims, and liabilities intended to survive the novation. It should also state whether either party may take further steps under the former contract to establish, quantify, or enforce those rights.

Key takeaways

Assignment and novation are not interchangeable. Assignment may transfer a contractual benefit, but it does not transfer the obligation to perform the contract. Novation can replace a party and transfer the ongoing contractual relationship, but it requires consent and careful treatment of releases, accrued rights, and past liabilities.

Before entering into either arrangement, parties should determine:

• whether they intend to transfer a payment right, warranty, other contractual benefit, or the entire contractual position;
• whether the contract permits the transfer and what consent or notice requirements apply;
• the date on which the transfer will take effect;
• how the documents will treat accrued payments, defects, delay claims, variations, indemnities, and other liabilities;
• whether any amounts remain unpaid under the original contract and which party will be responsible for them after the transfer;
• whether guarantees, security, insurance, warranties, or other related agreements require amendment or replacement; and
• whether the incoming party has completed appropriate due diligence on the contract and project position.

In construction, the distinction can determine who receives payment, who must complete the works, who bears responsibility for design and defects, and who remains exposed when a claim arises.

Clear drafting and appropriate due diligence help ensure that the transfer achieves its intended commercial outcome without creating unintended liabilities or removing valuable rights.