My subcontract is being novated. What does that mean, and should I agree?
Novation replaces one party to a contract with another: the whole subcontract, rights and obligations, moves to the incoming party, and it needs the consent of all three. For a subbie it usually arrives as a deed of novation when a project is sold, a builder restructures, or a design and construct job changes hands. Before you sign, check who you are being novated to and what happens to money already owed to you. Your consent is leverage, so use it.
Novation is not assignment
Assignment transfers rights only. Novation transfers the lot: after novation, your contract is with the new entity as if it always had been. That is the part to read carefully. Check whether the incoming party takes responsibility for claims and payments that arose before the novation date, or whether those stay behind with the outgoing party, who may be about to disappear.
Four checks before you sign
Who is the new party? Get the legal entity name and ABN, not the trading name, and check its solvency and payment history. Builder Check lines up the free public searches for one name.
What happens to money already owed? Unpaid claims, variations in the pipeline and retention held should be dealt with in the deed: paid before novation, or expressly taken over by the incoming party.
What happens to your security? Bank guarantees and cash retention held by the outgoing party should be transferred with the release dates unchanged, or returned.
Is there a release hiding in it? Some novation deeds also release the outgoing party from all claims. Sign that and you may be giving up your claims against the party that actually owes you.
Why your consent is leverage
Novation needs your signature. That is the moment to settle the outstanding items: unpaid claims paid or acknowledged in writing, retention transferred with a clear release date, and anything else that has been sitting open. Once you have signed, the pressure is gone.
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Scan my subcontract freeCommon questions
Can my subcontract be novated without my consent?
A novation needs the consent of all parties. Some subcontracts contain drafting in which you agree to novation in advance, so read the assignment and novation clause when you sign the contract, not when the deed arrives.
What happens to my retention when a contract is novated?
Whatever the deed says, which is why you read it. Ask for retention and any bank guarantees to be transferred to the incoming party with the release dates unchanged, or returned before the novation takes effect.
What is the difference between a deed of novation and a deed of release?
A deed of novation swaps a party; a deed of release gives up claims. Some novation deeds include a release of the outgoing party, which combines the two. Read for both, and get advice if the amounts at stake are significant.
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General information for Australian subcontractors, not legal advice. Statutory deadlines and details vary by state and change over time; verify them before relying on them. Written by Mat Kennedy at The Construction Contracts Co.