Last edited 24 Sep 2020

Difference between assignment and novation

Transferring an interest in a construction contract from one party to another can be done by either assignment or novation. The differences are minimal but important to understand, as the assignment of an interest when it could be novated might render one party liable for the contract if the other party is unable to perform their obligations.

Assignment is the right to transfer 'choses in action' defined as 'all personal rights of property which can only be claimed or enforced by action and not by taking physical possession'. This definition includes benefits arising under a construction contract such as right to payment, but not burdens such as the obligation to pay. The definition also includes claims for breach of contract.

A common error is to assume that the right to assign must be agreed as part of a contract, like a novation. Assignment is a unilateral right created by statute, Section 136 of The Law of Property Act 1925 or by the law of equity (law developed by the Chancery Division of the High Court of England and Wales). However, the right to assign can be excluded, or restricted, by contract, for example, it is common in collateral warranties to restrict to one assignment without the written permission of the warrantor.

By comparison, novation is a process in which the contractual rights and obligations are transferred to a third party. The benefits and the burdens can be transferred by a novation agreement, rather than just the benefits as with assignment. In building design and construction, novation normally refers to the process by which design consultants are initially contracted to the client, but are then 'novated' to the contractor.