Wolf in Sheep’s Clothing: When Your ‘Deed of Assignment’ Is Really a Novation

By Bianca Hoare

What if signing a ‘Deed of Assignment’ did not actually release your company from its obligations under the contract?

Inthis edition, Crisp Law unpacks a deceptively simple question that arises constantly in construction: when a contracting entity is replaced mid-project, is the document doing the transfer legally an assignment or a novation? The two are not interchangeable, and Australian courts will look past the label on the page. For head contractors restructuring mid-build, principals consenting to a change of counterparty, or consultants and subcontractors asked to sign a deed they did not draft, getting the distinction wrong can leave the original party still on the hook — sometimes twice over.

The basic difference: rights versus rights and obligations

The Australian Government Solicitor’s 2017 briefing on Novation and Assignment of Contracts sets out the distinction concisely. In the case of Norman, the AGS describes an assignment as the mechanism by which a party (the assignor) “transfers its existing rights and benefits under that contract to a third party (the assignee)”. Crucially, the assignor cannot transfer its burdens, obligations or liabilities through an assignment. The AGS expressly states that “the assignor is not released from its obligations under the contract”.

Novation operates very differently. Drawing on the case of Olsson v Dyson, the AGS describes it as “the mechanism by which a contract is terminated, and a new contract is made between different or additional parties”. A novation requires the consent of all parties — original and new — and produces a clean substitution. The old contract is gone; a new one stands in its place.

The practical consequence is significant: an assignment leaves the original party fully liable for performance; a novation releases it.

A trap hiding in plain sight

Consider a common construction scenario. A head contractor is part of a corporate group and decides, midway through a project, that the works will be performed by a related entity within the same group. The head contractor issues “Deeds of Assignment” to its consultants and trades, with a recital noting that the new entity is part of the same group of companies. The intention is plainly to substitute the new entity for the original.

The AGS briefing addresses this exact situation. Table 2 of the briefing expressly states that where “the contract is to be performed by a different company in the same company group”, the appropriate mechanism is novation, not assignment. Despite this, deeds labelled as “assignments” are routinely used across the industry to attempt the same outcome — a label that does not match the legal effect intended.

Substance over label: the Australian position

Australian courts, including the High Court in ALH Group Property Holdings, prioritise the legal effect of a document over its title. The Court observed at [15] that the legal nature and effect of an agreement “is to be determined by the construction of its terms, including those terms which may be implied in order to give effect to the intention of the parties”. On novation specifically, the Court held at [12] that the enquiry “is whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged”.

The label “Deed of Assignment” will not save a deed that is, in legal substance, an attempted novation — nor will it cure the defects that flow from misclassification.

The cost of getting the legal nature wrong: Energy Works (Hull)

The consequences of an asymmetric transfer of contractual rights were illustrated in the MW High Tech Projects UK case. Following termination of the main contract, the head contractor (MW) was required, under the termination provisions, to assign its sub-contract with Outotec to the employer. When disputes followed, MW argued that the transfer should be construed either as an assignment of future rights only, or alternatively as a novation transferring both benefit and burden — which would have left it free to pursue Outotec for accrued damages relating to project delays. O’Farrell J rejected both arguments and held that, on its natural meaning, the transfer was an assignment of all accrued and future rights and was not a novation.

The consequences for MW were significant. As commentary on the decision has observed, the assignment stripped MW of its right to pursue Outotec for damages arising from project delays, while leaving MW liable to pay Outotec for works performed under the sub-contract, and exposed to the employer’s claims for liquidated damages, replacement contractor costs and defects.

In short, the assignment carried away the benefit of the sub-contract but left its burdens intact — precisely the asymmetric outcome that follows when a party belatedly wishes its assignment had been a novation.

What this means for the Building and Construction Industry

For our construction clients — head contractors, principals, consultants and subcontractors alike — the lesson is direct: do not assume that the title on a deed reflects its legal effect.

• Head contractors restructuring mid-project, or moving works between group entities, should ensure the documentation matches the intended outcome. If the goal is full substitution and release, a properly executed deed of novation is required.
• Principals asked to consent to an “assignment” of a head contract should scrutinise the substance of the transfer. Consenting to what is in truth a novation, but dressed as an assignment, may leave you with weaker rights against a less financially robust counterparty, with no recourse against the original contractor.
• Consultants and subcontractors routinely receive “Deeds of Assignment” with little context. Signing one without understanding whether you are agreeing to release the original head contractor — or merely to receive payment from a new entity — can have serious consequences for your ability to recover unpaid sums, claim variations or pursue damages.

At Crisp Law, we regularly advise on the structure and execution of novation and assignment deeds across the construction sector. Where the wrong instrument is used, the consequences extend well beyond technical drafting — they can shift significant liability between parties.

If you are negotiating a transfer of contracting obligations, being asked to consent to one, or simply unsure whether the deed you have been handed says what you think it says, our experts are here to assist.

Contact Crisp Law for advice and information:

Telephone: +61 2 8042 8701

Email: admin@crisplaw.com.au

Web: https://crisplaw.com.au/

References

Norman v Federal Commissioner of Taxation (1963) 109 CLR 9

Olsson v Dyson (1969) 120 CLR 365

ALH Group Property Holdings Pty Ltd v Chief Commissioner of State Revenue (2012) 245 CLR 338

Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and Others [2020] EWHC 2537 (TCC)

Australian Government Solicitor, Legal Briefing: Novation and Assignment of Contracts (19 May 2017)

N Morris, Construction law terms: assignment and novation, Pinsent Masons Out-Law (14 July 2023)

Photo by Julien Riedel on Unsplash