Novation

Novation is the legal process by which a contract is transferred from one party to another, with the original party's rights and obligations extinguished and assumed entirely by the new party, requiring consent from all three parties.

What Novation Is

Novation replaces one contracting party with a new party, transferring both the benefits and the burdens of the original contract. Unlike assignment, which can transfer only benefits and leaves the original party liable for obligations, novation creates a clean break — the outgoing party is fully released, and the incoming party steps into its place as if they had been a party from the outset.

All three parties must consent: the contracting authority, the outgoing contractor, and the incoming contractor. Without trilateral agreement, novation is not valid.

When Public-Sector Novation Arises

Novation occurs in several common scenarios:

• Supplier mergers and acquisitions — when a contractor is acquired, the buyer may seek novation so the contract sits with the new legal entity
• Corporate restructuring — a supplier reorganises and wishes to move the contract to a subsidiary or parent company
• Design-and-build projects — novation of a consultant's appointment from client to main contractor is a standard procurement mechanism in construction
• Insolvency — administrators may novate contracts to a rescue entity or purchaser of the business

Legal and Regulatory Considerations

Under the Procurement Act 2023, and previously under the Public Contracts Regulations 2015 (Regulation 72), substantial modifications to a contract that change the contractual partner generally require a new procurement, unless a specific ground applies. Novation following a corporate restructuring — where the new entity meets the original selection criteria and there is no intention to circumvent procurement rules — is a recognised exception.

Contracting authorities must carry out due diligence on the incoming party, verifying that it possesses the technical capability, financial standing, and any required accreditations that the original contractor held at award.

Practical Steps

1. Obtain written consent from all three parties via a deed of novation 2. Check the original contract for novation or assignment clauses 3. Conduct due diligence on the incoming contractor 4. Assess whether the change constitutes a material modification that would trigger a new procurement 5. Update the contract register and notify relevant stakeholders

Novation vs Assignment

| | Novation | Assignment | |---|---|---| | Obligations transferred | Yes | No | | Original party released | Yes | No | | Consent required | All three parties | Usually just the counterparty |

Contracting authorities should always seek legal advice before agreeing to novation, particularly where the incoming entity is newly formed or the contract carries significant risk.