Assignment of Construction Contracts — Rules and Restrictions

When a project changes ownership — through a sale, refinancing, corporate restructuring, or insolvency — the question of what happens to the construction contract becomes critical. Can the contract be transferred to the new owner? Can the contractor object? Who is liable if the original employer no longer exists?

The Problem

Assignment and novation are frequently confused, and the consequences of getting the distinction wrong can be serious. Assignment transfers the benefit of a contract (the right to receive something) to a third party. Novation is a tripartite agreement that substitutes one party for another, transferring both benefit and burden. Most standard construction contracts restrict or prohibit assignment without consent, requiring novation instead.

The problem most commonly arises in three situations: a developer sells the site mid-construction; an employer is acquired by a corporate buyer; or a contractor’s business is sold. In each case, the question is who owes the contractual obligations going forward, and who is protected.

The Legal Principle

The basic rule under English law is that the benefit of a contract may be assigned without the other party’s consent, unless the contract prohibits it (which most standard construction contracts do). The burden of a contract — the obligation to perform — cannot be assigned without the other party’s agreement. This is a fundamental principle of contract law.

Where a contract restricts or prohibits assignment, any purported assignment in breach of that restriction is void as against the other party, even if it is effective between the assignor and assignee. The contractor can continue to treat the original employer as the contracting party.

Novation, by contrast, requires the agreement of all three parties. It extinguishes the original contract and creates a new one between the contractor and the new employer. The original employer is released. This is the correct mechanism for a full transfer of the employer’s position.

Practical Application

When a development is sold or refinanced, the employer should identify the assignment/novation provisions in the building contract at the earliest opportunity. If novation is required (as it almost always will be), the contractor’s consent must be obtained. This gives the contractor an opportunity to renegotiate terms, address outstanding payment disputes, or require parent company guarantees from the new employer.

Contractors should maintain a record of all assignment or novation provisions in their contracts and flag proposed assignments for careful review. A novation that includes a release of the original employer should not be signed without first resolving any outstanding claims against that employer.

Risks

An employer who assigns the benefit of a contract without consent, where the contract requires it, risks the contractor refusing to recognise the assignee and continuing to deal only with the original employer. A contractor who novates without securing outstanding claims against the original employer may find those claims are effectively waived. Both parties need legal advice before executing any assignment or novation.

Mitigation

Review assignment and novation provisions at contract execution. Include in any sale or refinancing agreement an obligation to obtain contractor consent, and plan for this in the transaction timeline. When negotiating novation agreements, address outstanding claims, retention balances, and defects liability obligations before executing the novation.

Conclusion

Assignment and novation are technical legal mechanisms that require careful planning in any construction project that is likely to change ownership or structure. The cost of getting them wrong — a void assignment, an unexpected liability, or a loss of claims position — can be significant. Take specialist advice and address the issue early.