May 16, 2022
As set out in Part 1 of this article series, deeds have various uses within the construction industry, including, the transfer of rights or obligations under a contract or varying the terms of a contract.
It is essential to understand the effects these deeds may have on your rights and obligations under your contract. This article will explore some types of deeds commonly used in the construction industry, specifically deeds of assignment, novation, and variation.
Deeds of Assignment
Deeds of assignment operate as legal mechanisms which allow a party to assign (or transfer) its rights and benefits under a contract to a third party, whilst remaining bound by its obligations under the contract. Here, the third party does not become a party to the contract, but they are able to enforce their rights to secure the benefits assigned to it.
Importantly, the ability to assign the benefit must be provided for in the contract or otherwise agreed to between the parties. Some contracts may:
- restrict assignment without the written consent of both parties;
- allow one party the right to assignment;
- specify which rights may be assigned; or
- prohibit the assignment of specific rights (i.e., warranties and indemnities).
It is important to closely consider your contract to identify any restrictions, prohibitions or conditions stipulated for the assignment of certain rights under your contract prior to executing a deed of assignment.
Deeds of Novation
Unlike deeds of assignment, deeds of novation transfer all rights, benefits and obligations under a contract to a new third party. These agreements extinguish an existing contract and create a new binding contract between new parties on the same terms as those extinguished. Essentially, having the effect of changing the parties to an original contract, without any change to the original rights and obligations.
Novation by way of a deed is typically used in the construction industry between head contractors and subcontractors. For example, this may arise where:
- contractor A has a contract with subcontractor B and wishes to end contracting with subcontractor B and engage subcontractor C;
- the original contract provides for novation subject to written consent from all parties; and
- the transfer of rights and obligations under the original contract to a new third party (i.e., subcontractor C) is more commercially viable than proceeding with the process of terminating the original contract.
Upon execution of a deed of novation, the original contract between contractor A and subcontractor B would end and be replaced by a new contract between contractor A and subcontractor C (on the same terms as the original contract).
If you are considering using a deed of novation, compliance with any contractual restrictions (i.e., obtaining written consent) is necessary to avoid breaches of contract and ensure the novation is enforceable.
Deeds of Variation
Deeds of variation allow parties to vary or change the terms of their contract to better suit the current circumstance of the project. These deeds set out the details of what amendments are being made to the contract, and any other legal formalities required to put the variation into effect.
Where the parties agree to vary the contract (but consideration does not exist meaning a varied contract could not be formed), a deed of variation is a useful tool to ensure the change is valid and effective. Deeds of variations are often used where changes to a contract are significant in effect, and some contracts will set out specific processes for the variation of the contract (i.e., in circumstances where a change in scope has been directed).
It is important to note that, in some circumstances, the variation of one term may impact the operation of the contract as a whole and parties should seek legal advice to fully understand the potential risks of taking this step.
Lamont Project & Construction Lawyers
Lamont Project & Construction Lawyers’ team has extensive experience with the operation of deeds and industry knowledge about various types of deeds applicable uses and risks on major projects. If you have any questions about any matters raised in the above article as it relates to your specific circumstances, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Quinn Hironaka
Email: [email protected] or [email protected]
Phone: (07) 3248 8500
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