Assignment and novation Date 30 June 2010

Judgment Davies & Others -v- Jones and Others [2009] EWCA Civ 1164 The Issue The difference between assignment and novation. Implication If the objective is for a third party to accept both the benefit and burden of a contract, it will be insufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. To achieve the objective a novation should occur as it allows for both the benefit and burden to be transferred to the third party and leaves no residual liability with the original party.

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Third parties (i.e. someone other than the contracting parties) are commonly involved in construction contracts and this is commonly achieved by the process of either assignment or novation. Assignment is often encountered in relation to collateral warranties, where the benefit of a contract is transferred to a third party. Novation may be encountered where the original contracting party wants both the benefits and burdens under a contract to be transferred to a third party. Novation is most often found in connection with design and build contracts, where the employer novates the consultants contracts to the contractor, so that both the benefit and burden of those contracts are transferred to the contractor. When considering assignment and novation it is important to distinguish between the benefit and burden of a contract. In a construction contract the burden to the contractor is the obligation to undertake the work and its benefit is the right to be paid in accordance with its terms. The employers benefit is its right to have the work completed whilst its burden is to make payment. An assignment of rights under a contract is normally restricted to the benefit of the contract. For example, if the employer assigns a construction contract to a third party the obligation to pay the contractor remains with the employer and is not transferred to the third party. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation. A novation is a tripartite agreement by which a contract between A and B is discharged and a new contract is made between A and C. Whilst the new contract will typically be on the same terms as the first contract, that is not always the case. The distinction between assignment and novation was addressed in the case of Davies & Others -v- Jones & Others in which the court considered whether a deed of assignment of the rights under a contract could also

transfer a positive contractual obligation to make payments. The case involved three parties and concerned the sale of land to allow the construction of a supermarket. Davies owed the land and Jones contracted to buy the land from Davies. Jones then contracted to sell the land to Lidl (the second defendant). Via a deed of assignment Jones then assigned his rights and interest in the land under his contract with Davies to Lidl and the contract between Jones and Lidl was determined. The contract between Davies and Jones was completed by a transfer direct from Davies to Lidl and the payment by Lidl to Davies of the agreed sum less 100,000.00. The land had been the site of a garage and it was necessary to remove the buildings and to clear the site. Jones was required to undertake the site clearance work under the contract with Davies, and under clause 18 of the contract Jones was allowed to retain 100,000.00 from the purchase monies payable to Davies until the work was done, and following completion of the site clearance work Jones was entitled to keep half of the cost of doing the work and release any balance of the 100,000.00 to Davies. There was a similar clause in the contract between Jones and Lidl but Lidl was able to keep the whole cost of undertaking the site clearance work. Lidl undertook the site clearance work and kept the sum of 100,000.00, and Jones also failed to pay Davies any of the retained money on completion of the site clearance works. Davies denied that Lidl was entitled to keep the 100,000.00 and sought recovery of it from Lidl, claiming that the benefits granted by way of the assignment were conditional on Lidl performing Mr Jones obligations under the contract with Davies. Thus, the court considered whether Lidl was bound to observe the terms of the contract between Davies and Jones, particularly clause 18, given that the benefit of the contract had been assigned to it. The court held that the benefit assigned to Lidl did not require it to perform the obligations of Mr Jones under the contract with Davies, as it imposed no burden on Lidl. The only person who clause 18 of the contract was binding on was Mr Jones and the transfer of it to Lidl imposed no obligation on it to perform Mr Jones obligations which remained with him, not Lidl. No positive contractual obligation to make payments had been transferred to Lidl. This case reaffirmed the general principle that when a party takes an assignment of a contract, it does not take on the burden. If the objective is for a third party to accept both the benefit and burden of a contract, it will be insufficient to rely on a deed of assignment, as the burden of the contract remains with the assignor. To achieve the objective a novation should occur as it allows for both the benefit and burden to be transferred to the third party and leaves no residual liability with the original party.

- Gary Peters