With news that yet another employer is facing financial difficulties, what should a contractor look out for if an employer goes into administration and, in order to salvage the project, a new employer is proposed?

Assignation or Novation?

Firstly, you need to consider how the contract is being transferred from the original developer to the new one. This is typically achieved by either assignation (or assignment in England and Wales) or novation. Which of these methods of transfer is the most appropriate, and which are legally competent?

In Scotland, obligations and rights can be assigned at common law, sometimes without consent. No particular wording is required to constitute an assignation, as long as it effects a transfer. To be effective, however, notice of an assignation of rights must be given to the other party (in this case the Contractor).

Novation may be the more suitable route, involving the substitution of a new party for an existing party, with the new party assuming the rights and obligations of the existing party under the contract. A novation effectively extinguishes the contract and replaces it with another, on the same terms, and requires the consent of all of the parties to the original contract. The parties should specifically consider how pre-novation liabilities are dealt with and be aware of the possibility of "black holes" and "no loss" arguments: in other words, make sure the novation agreement correctly allocates responsibility between the existing and new employers for claims and payments, etc.

The position in England

In England, it is only possible to assign the benefit of a contract. If you want to transfer obligations this has to be by novation; at least it requires documented agreement of the third party affected. The most robust form of assignment is a legal assignment, which must be in writing and unconditional, and can only be done on notice to the other party. Of course, the assigning employer will still be liable for performance of any remaining obligations (for example any remaining payment obligations) and, as such, novation may be more appropriate. Consent to novation is required (this can be inferred, so if you object, say so!).

Practicalities

Whether novation or assignation is chosen, and whether the contracts are under Scots or English law, best practice suggests that the relevant agreement should be documented as between the old and new employers and the contractor.

Before proceeding, always check the terms of the contract. An express provision that prohibits assignation, or only permits assignation with consent, will override the common law. Remember that an entitlement to assign the contract may just mean the employer's rights, and not the employer's obligations as well. It is common for assignation clauses to have an impact on the number of permitted assignations, the method of assignation, whether consent is required, the class of persons to whom the assignation may be made, and whether it can be assigned at all. Even if the assignation clause does not specifically refer to novation, it can, in the absence of an express term to the contrary, be interpreted to limit the right to novate.

Finally, before the legals are all tied up, don't forget:

  • Check the finances of the new employer - does it have the resources to make the necessary payments under the contract?
  • Are all of the contract documents being assigned/novated? In a complex project it is easy to overlook some.
  • Are all of the contract documents capable of transfer? For example, a performance bond may not be capable of assignation, and if a new bond is required costs may be incurred.
  • Does the assignation/novation increase risk/liability in terms of duration or amount?
  • Consider the impact of any assignation of the Building Contract on collateral warranties, novated appointments, payment guarantees, etc.
  • If you are asked to give consent, ask to see the assignation/novation itself. If not, you will be consenting to something you have not seen.
  • Who pays your legal costs?