Novation in construction projects
Novation in construction projects

The following Construction practice note provides comprehensive and up to date legal information covering:

  • Novation in construction projects
  • What is novation?
  • Novation in the construction industry
  • Effect of novation
  • Novation formalities
  • Contractual obligation to novate
  • Can novation be implied or inferred?
  • Is novation always appropriate?
  • Employer's continuing interest and consultant’s conflict of interest
  • The 'no loss' argument
  • More...

What is novation?

Novation is the transfer of one party’s rights and obligations under a contract to a third party. Novation effectively substitutes a contracting party (the 'outgoing party') with a new party (the 'incoming party') and, in legal terms, it amounts to the extinguishing of the original contract and the creation of a new contract under which the same obligations are to be performed, but by different parties.

Novation must be distinguished from assignment—assignment only permits the benefits of a contract to be transferred, whereas novation allows both the benefit and the burden to be transferred to the incoming third party. Benefits of a contract include the right to performance of that contract; burdens include contractual obligations such as the duty to perform the obligations and to make payments under the contract. See Practice Notes: Assignment in construction contracts and Legal and equitable assignment in construction contracts.

Novation in the construction industry

Novation is most commonly used in construction projects in the following circumstances:

  1. transfer of design consultants’ appointments from the employer to a design and build contractor. The design consultant provides design services to the employer until such time as a building contractor is employed. When the employer and design and build contractor enter into the building contract, the consultant’s appointment is novated to the contractor and the contractor accepts responsibility for employing the consultant directly.

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