What is an ‘assignment’?
An assignment is the transfer of a contract's ‘benefit’ or ‘burden’ by one contracting party to a third party. The contractual benefit is a party's right to receive performance of the other party's contractual obligations. The contractual burdens are the obligations to be performed by each contracting party.
What are the benefits and burdens of a construction contract?
The employer's:
• benefit is its right to have the contractor carry out the works; and
• burden is its obligation to pay the contractor for doing so.
The contractor's:
• benefit is its right to be paid for carrying out the works; and
• burden is its obligation to do so.
Can the benefit of a construction contract be assigned?
Yes – Unless there is:
• a contractual prohibition against such an assignment; or
• something personal about the rights being assigned.
The fact that such an assignment can be prohibited recognises the possibility of a party having a genuine commercial interest in the identity of the other contracting party – for example a contractor's interest in ensuring that the employer (its paymaster) does not change.
Can the burden of a construction contract be assigned?
No – Unless:
• there is a contractual provision allowing such an assignment; or
• the contracting party with the right to receive the performance agrees.
This general prohibition is not surprising. Without it:
• the contractor would be able to escape from unwanted contractual obligations without agreement from or even reference to the employer; and
• the employer would have no say in the identity of the third party carrying out the works. Agreement by the employer to the assignment of the contractor's burden would generally be ill-advised because:
• the third party would not be in a contractual relationship with the employer; and
• the employer would therefore not be able to enforce performance against either the contractor or the third party.
What is ‘vicarious performance’ and can it be prohibited?
Vicarious performance is the performance of a party's contractual obligations by a third party. Whilst a contractor cannot ‘assign’ the carrying out of the works to a third party, it will often engage sub-contractors to carry them out. Whilst vicarious performance may validly be prohibited by the contract, construction contracts do not of course normally do so. The contract may, however, require sub-contractors to be chosen or approved by the employer.
What is a novation and how is it achieved?
A novation substitutes a third party for one of the original contracting parties under a contract and is achieved by an agreement which:
• is between the two original contracting parties and the third party;
• transfers the benefit and burden of one of the (original) contracting parties to the third party; and
• overcomes all the potential legal difficulties of assignment and vicarious performance by a tripartite agreement.
In other words:
• the original contract is between A and B;
• the third party, C, takes over B's rights and obligations;
• B is relieved of its rights and obligations; and
• the ‘new’ (novated) contract is between A and C.
It is unusual for a construction contract to be novated (to a ‘new’ employer or contractor). It is, however, common for the appointment by the employer of a consultant to be novated from the employer to the contractor as part of the arrangements for a design and build contract.
Please note: These key points are only intended to give general guidance and are no substitute for specific legal advice on any given situation.