A recent TCC Court case (Energy Works (Hull) Limited v MW High Tech Projects UK Limited  EWHC 2537 (TCC)), set out a very useful summary of the legal principles relating to ‘Assignment’ and to ‘Novation’. These legal principles are summarised below.
A statutory assignment of contractual rights involves the transfer by A (the assignor) of its rights and remedies under a contract with B to a third party C (the assignee) (subject to equities).
Section 136 of the Law of Property Act 1925 provides:
"(1) Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice –
(a) the legal right to such debt or thing in action;
(b) all legal and other remedies for the same; and
(c) the power to give a good discharge for the same without the concurrence of the assignor …"
Therefore for an effective statutory assignment to apply, three conditions must be fulfilled:
(1) the assignment must be absolute and not purport to be by way of charge only;
(2) it must be in writing under the hand of the assignor;
(3) express notice in writing thereof must be given to the debtor or trustee.
The general effect of the section is to allow the assignee to sue the debtor in his own name instead of having to sue in the name of the assignor.
In Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd  1 AC 85, the House of Lords was concerned with the effect of contractual provisions in two contracts that prohibited the assignment of each contract without the consent of the other party. In considering the effect of this prohibition, Lord Browne-Wilkinson stated:
"The argument runs as follows. On any basis, clause 17 is unhappily drafted in that it refers to an assignment of "the contract". It is trite law that it is, in any event, impossible to assign "the contract" as a whole, i.e. including both burden and benefit. The burden of a contract can never be assigned without the consent of the other party to the contract in which event such consent will give rise to a novation…
Although it is true that the phrase "assign this contract" is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned."
In that same judgment, Lord Browne-Wilkinson recognised that a distinction could be drawn between ‘future rights’ and ‘accrued rights’ for the purpose of an assignment but added that clear words would be required to separate them.
Although Linden Gardens was concerned with terms of prohibition rather than permission of an assignment, the relevant principles from that judgment can be summarised as follows:
(1) Subject to any express contractual restrictions, a party to a contract can assign the benefit of a contract, but not the burden, without the consent of the other party to the contract.
(2) In the absence of any clear contrary intention, reference to assignment of the contract by the parties is understood to mean assignment of the benefit, that is, accrued and future rights.
(3) It is possible to assign future rights under a contract without the accrued rights but clear words are needed to give effect to such intention.
Novation can be summarised as an agreement or agreements between A, B and C pursuant to which B's rights and obligations under an existing contract with A are assumed by C under a new contract with A. The original contract between A and B is extinguished and a new contract is formed between A and C. All parties must consent to the novation.
The necessary consent may be given in advance of the novation provided that such consent is clearly expressed.
The need for clarity, if advance consent to novation is intended, was explained in Galliford Try Infrastructure Ltd v Mott MacDonald Ltd (2008) 120 Con LR 1 by Akenhead J:
"(i) … as novation does not as such involve a transfer of rights or obligations, the word 'transfer' is not apt to describe a requirement to novate. (ii) … If what was intended was a right to require MM to novate with MCL or the design and build contractor yet to be appointed, one would expect much clearer wording than simply, 'we shall be entitled to transfer this Appointment'. One would need wording which explained that the appointment would be extinguished and replaced by a new one. On balance, I consider that 'assign or transfer' were synonymous."
The differences between novation and assignment were summarised helpfully in The Argo Fund Ltd v Essar Steel Ltd  EWHC 600 by Aiken J at :
"… there are four main differences:
First, a novation requires the consent of all three parties involved … But (in the absence of restrictions) an assignor can assign without the consent of either assignee or the debtor. Secondly, a novation involves the termination of one contract and the creation of a new one in its place. In the case of an assignment the assignor's existing contractual rights are transferred to the assignee, but the contract remains the same and the assignor remains a party to it so far as obligations are concerned.
Thirdly a novation involves the transfer of both rights and obligations to the new party, whereas an assignment concerns only the transfer of rights, although the transferred rights are always "subject to equities".
Lastly a novation, involving the termination of a contract and the creation of a new one, requires consideration in relation to both those acts; but a legal assignment (at least), can be completed without the need for consideration."
The relevant principles that can be drawn from the above are, therefore, as follows:
(1) Novation occurs when the original contract between A and B is extinguished and replaced by the creation of a new contract between A and C.
(2) Novation requires the consent of all parties to the original and the new contract.
(3) Such consent or authorisation can be given in the original contract but clear words are needed to express such intention and the terms of the new contract must be sufficiently certain to be enforceable.
(4) In every case the Court must construe the contractual arrangements to give effect to the expressed intentions of the parties.
(5) The Court must not confine the interpretation exercise to a semantic analysis of the contractual provisions and other material documents; notwithstanding the descriptions or labels used by the parties, the established rules of construction and/or interpretation of contract terms apply.
Peter Barnes, Director, Blue Sky ADR Ltd
Date 28 October 2020
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