What is novation and how does it differ from assignment?
Novation is a new contract that transfers the rights and obligations of one contractual party to a new third party. The third party effectively replaces the original party as a party to the contract.
Assignment differs from novation in so much that the parties to the contract do not change.
Can you give examples of assignment and novation?
- Assignment of the rights under a collateral warranty to a different tenant or purchaser;
- Novation of the design team under a design and build contract.
What is the key issue after a design team has been novated?
Whether the new party has the right to take action against the novated party for breaches that occurred before novation.
If the contractor took full responsibility for the design what would they want?
They would want the ability to take action against the consultants for breaches before novation.
How does novation affect the employer’s rights?
- They lose all contractual relations with the novated party and therefore the right to take action for a breach;
- It is therefore common for there to be a collateral warranty between the employer and novated party.