Understanding assignment and novation in NEC contracts

Chris Turner

David Hunter

Key points:

• NEC4 contracts introduced a new clause enabling each party to assign the benefit of the contract to another party. 
• However, standard NEC4 contracts do not enable the parties to novate both the benefit and burden of the contract to another party. 
• Parties may wish to clarify both assignment and novation using Z clauses.

Construction contracts often involve complex arrangements among multiple parties. During a construction project's lifecycle, there may be a necessity to transfer contractual rights and obligations from one party to another. This article explores the key differences between novation and assignment within the context of NEC contracts. The discussion highlights relevant clauses, practical limitations, and the importance of customising contract amendments to manage risk and prevent unintended outcomes. 

Assignment

Assignment is the transfer of rights from one party to another party without transferring its obligations. An example of this is when a client transfers its rights in a contract with the main contractor to a purchaser of the project. The purchaser would then become the ‘assignee’ and would receive the benefit of the original construction contract, such as enabling the purchaser to enforce the works to be completed. The limitation of assignment is that it only transfers the benefit of a contractual obligation and not the burden. Therefore, in the example provided, the original client – the ‘assignor’ – would keep the burden of paying for the work to be undertaken. 

Under English law, if a contract is silent on assignment, the rights under the contract can be unilaterally assigned by the assignor to an assignee without restriction. This may be an undesirable outcome as parties do not want to be subject to unlimited assignments.  

Contractors and designers may also be subject to restrictions within their professional indemnity insurance which limit the number of times an agreement, such as a collateral warranty. can be assigned. This is a common-sense approach as the parties often want to know to whom they may end up liable. Due to the position under English law, it is common for the parties to limit assignment via clauses within the contract. For example, the client will typically specify it has a unilateral right to assign a specific number of times, and it may restrict the contractor from assigning any element of the contract without its consent. 

Novation

Novation refers to the process by which a party’s rights and obligations under a contract are transferred to a third party. This is different to assignment which only allows contractual rights to be transferred. Novation is commonly associated with design and build contracts. Typically, the client initially engages a consultant to carry out the design work. However, if the client later prefers to combine responsibility for both design and construction under a single entity, the consultant may be novated to the contractor.  

Through a novation agreement involving the client, consultant and contractor, the consultant’s duties and liabilities are transferred to the contractor. As a result, the consultant is released from any contractual obligations to the client and instead assumes those obligations toward the contractor. 

Assignment under NEC contracts

NEC3 contracts are silent on assignment and so any rules on assignment, if needed, must be introduced using a Z clause. The NEC4 ECC introduced a new Clause 28.1, which requires the parties to notify each other if they intend to assign the benefit of the contract. The only other restriction is that the client is not allowed to transfer a benefit or any rights if the receiving party does not intend to ‘act in a spirit of mutual trust and co-operation’ as required by Clause 10.2 of the contract. Similar provisions exist in the main and subcontract long-form versions of other NEC4 contracts. 

Assignment may be necessary following termination. The NEC4 ECC, and the other long forms, allow the client to instruct the contractor to assign the benefit of any subcontract or other contract related to the performance of the contract to the client (Clause 92.2 para 2). However, this right exists only when the client has terminated for reasons R1–15, R18 or R22 and will, in any event, require a new contract with negotiated terms and payment (see Hunter 104). 

According to Eggleston 2019, the provisions of Clause 28.1 are ‘exceedingly modest’ compared to that seen in other standard forms of contract. For example, the JCT Design and Build 2016 contract does not allow either party to assign without the other party’s consent (Clause 7.1). NEC4 users wishing to place greater restrictions, including a requirement to obtain the consent of the other party, may need to consider amending the contract. 

Novation under NEC contracts

NEC4 contracts do not make provision for novation. This is a conscious decision by the NEC4 Contract Board, recognising that the process of novation can be complex and lead to disputes over liability for errors that existed in the design prior to novation (see Blyth & Blyth Limited v Carillion Construction Ltd (2001) 79 Con LR 142 [CSOH]).  

Volume 1 of the NEC4 User Guides ‘Establishing a procurement and contract strategy’ states ‘there is no shortcut handover NEC document as each contract placed under NEC should be thoroughly understood by both Parties, regardless of how or why the two Parties finished up together in contract.’ It is recommended that if client and contractor are willing to continue using the services of a designer or other consultant following the initial stages of a project, they should do so using separate bi-party contracts. 

Termination under NEC4 is not mandatory when a party is facing bankruptcy or administration allowing novation of the contract to a third party which may help to minimise delay and disruption. Parties that wish to include the option of novation under these circumstances from the outset should do so by including relevant provisions in the form of additional conditions of contract (Z clauses). 

Conclusion

Assignment transfers only contractual rights, not obligations, and is addressed minimally in NEC4 contracts via Clause 28.1. Novation, which transfers both rights and duties to a third party, is not provided for in NEC contracts due to its complexity and risk of liability disputes.  

Parties using NEC contracts may wish to consider incorporating Z clauses to tailor provisions for assignment or novation, ensuring clarity and alignment with project needs and providing adequate legal protections.  

Assignment and novation can be complex; parties should seek specialist legal advice when drafting any additional provisions. Unintended consequences of incorrect drafting can leave a party unable to recover or pass on losses they have incurred, despite still being liable for them.