Novation in engineering and construction projects

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Assignment and novation are important legal topics with real ramifications for parties if they are not dealt with properly. The idea behind them is simple and easier to grasp when having an understanding of the way in which they work.

Novation is an important feature of engineering and construction projects — particularly in relation to design and build procurement. The novation of the design consultants’ appointments to the main building contractor is a common example. Novation must be executed properly and achieved correctly; if this does not happen, the effect can be the loss of a party’s legal rights altogether.

Novation is the legal name given to the mechanism by which contractual rights and obligations are transferred from one party to another. The process can also be viewed as a substitution. So, for example, if a contract entered into between A and B is ‘novated’ to C, the result is that C has ‘stepped into the shoes’ of B. The original contract is extinguished and is replaced by a new contract between A and C; C takes on the rights and obligations of B under the original contract. The substitution takes place by a novation between all three parties — A, B and C — as shown in the diagram in this briefing…

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