Rob Goldie

From: Rob Goldie

Sent: Sunday, 18 July 2010 2:22 PM
To: Rob Goldie
Subject: COMMERCIAL CIRCULAR - Assignment & Novation

Please see article below (with acknowledgement to FTI Brewer Consulting).

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.

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
employer’s 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
1
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

see http://www.brewerconsulting.co.uk/case.php for more articles.