Novation clause: what it means, a typical example, and what to ask for
Novation replaces one party to a contract with another: the new party steps into the old one's rights and obligations. In subcontracts it usually lets the builder hand your subcontract to the principal or another builder, often if the builder gets into trouble. Novation normally needs everyone's consent, which is why many clauses take yours in advance.
A typical builder version
The Subcontractor agrees that, if requested by the Contractor or the Principal, it will enter into a deed of novation in the form required, and irrevocably appoints the Contractor as its attorney to execute that deed on its behalf.
Illustrative wording of the kind found in builder-authored subcontracts, not taken from any one contract.
What it means for you
You agree now to have your subcontract transferred to whoever the builder or principal chooses later, on terms you haven't seen, and you let the builder sign the paperwork for you.
- Consent given in advance, with a power of attorney to sign on your behalf.
- No requirement that the new party is financially sound.
- No payment of amounts already owed to you before the novation takes effect.
What market looks like
Novation only with your consent at the time, not unreasonably withheld, to a party of at least equal financial standing, with all amounts due to you paid (or assumed in writing by the new party) before it takes effect.
What to ask for
"The Subcontract may only be novated with the Subcontractor's written consent, not to be unreasonably withheld, to a party of financial standing at least equal to the Contractor's, and on condition that all amounts then due to the Subcontractor are paid or assumed by the new party in writing."
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Common questions
Can my subcontract be novated without my consent?
Novation generally needs the consent of all parties. Many subcontracts get yours in advance, through a clause like the example above, which is why it is worth negotiating before signing.
What happens to money I'm owed when my subcontract is novated?
It depends on the deed. Unless the new party expressly takes on the old builder's debts, unpaid amounts can stay with the old builder.
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General information, not legal advice. Example wording is illustrative. Check any clause you rely on against your full contract and your state's Security of Payment Act. Written by Mat Kennedy, The Construction Contracts Co.