By Suzannah Newboult
When a party is substituted for another party to contract and assumes the original party’s rights and/or obligations, it does so either by way of ‘novation’ or ‘assignment’. Party A contracts with Party B. Party C is substituted for Party B. The contract is now between Party A and Party C.
If the substitution has occurred by way of novation, then the original contract is effectively replaced by a new contract on the same terms as if the new party, (Party C in the example above) was party to the contract from the outset.
In construction projects, novation is particularly important in design-and-build procurement where, typically, an employer will engage design consultants in the first instance to carry out the first design stages.
When the contractor is engaged, he is often required to take on the employer’s design consultants (by way of novation) as if he had employed them from the outset.
This enables the employer to have a true design-and-build project; the contractor becomes the single point of responsibility to the employer. In turn, the contractor has recourse against the consultant should the consultant have made any mistakes in the early design stages, because the contractor is deemed to have contracted directly with him right from the start.
In Qatar, the law draws a distinction between novation of rights and novation of obligations. As a result, it is possible for the party with rights under a contract to agree with a third party that the third party will take on the obligations of the other party.
In this circumstance, the consent need not be sought from the party originally responsible for performing the obligations. If, however, a party with obligations under a contract agrees with a third party that the third party will take on its obligations, consent must be sought from the party with the rights. If a third party is to take the rights of another party, consent will always be required.
In the construction context, these distinctions are often academic. Parties to construction contracts usually have both rights and obligations. For example: a contractor is obliged to carry out works, but also has the right to receive payment.
An employer has the right to receive the construction works, but is also obliged to make payment for them. Therefore, the consent of all parties is usually required to affect a novation in the construction context. Typically, therefore, a ‘novation agreement’ is signed by all three parties.
A provision expressly allowing novation can be inserted into a contract to pre-secure the agreement of a party.
A party acquiring rights by way of novation should be careful to make it clear if it is intended that it will also acquire the security for those obligations, for example, the benefit of a performance guarantee. The acquiring of security is not automatic.
The difference between novation and assignment is that assignment shifts the rights and/or obligations of the parties from a certain point in time only.
Party C takes on the rights/obligations of the contract at the point of the assignment only. Parties A and B remain liable/beneficiaries for the work carried out under the contract prior to the assignment to Party C.
CW