Knowing where your (future and accrued) rights lie: assignment in construction contracts

Knowing where your (future and accrued) rights lie: assignment in construction contracts

Knowing where your (future and accrued) rights lie: Assignment in Construction Contracts

Whether ensuring a previously instructed consultant’s appointment is novated to a contractor as part of a design and build project or ensuring the benefit of a building contract is transferred to a purchaser upon a project’s completion, there are many occasions in which the parties may transfer a contract to a third party during a construction project.

One means in which this is achieved is by way of ‘assignment’ which concerns the transfer of the benefit of a contract from one party to another. Here the third party is able to rely on the contract’s terms and conditions (including the right to bring proceedings against the contractor or consultant) but is not expected to fulfil any of the developer’s obligations under the contract.

Usually, where assignment takes place, the party receiving the benefit of the assignment is able to rely on the accrued and future rights under the contract. Recently however, the Technology and Construction Court was asked to consider this in further detail in the case of Energy Works (Hull) Limited v MW High Tech Projects UK Limited & Others [2020] EWHC 2537 (TCC) which considered whether an employer was able to take assignment of a sub-contract from a contractor following the termination of the main building contract.

Background

The project in question concerned the design and construction of a power plant to process refuse derived fuel. MW High Tech Projects UK Limited acted as the main contractor on the project and were appointed under an Energy Performance Contract by Energy Works (Hull) Limited.

In order to ensure key elements of the gasification plant were met, MW entered into a sub-contract with Outotec (USA) Inc as part of the project. Outotec subsequently provided a collateral warranty to Energy Works entitling them to step-in to the sub-contract should the main contract be terminated. Further to this, both the main contract and sub-contract contained clauses expressly requiring the sub-contract be assigned to Energy Works if the main contract was terminated. The wording of this clause was vague however, simply stating that they must “assign the subcontract” but not referring to the benefit of the sub-contract or any future or accrued rights.

Following difficulties on the project, Energy Works terminated the contract alleging delay by MW in completing the works. MW disputed this, stating that it was entitled to an extension of time to complete the works. While Energy Works considered stepping into the sub-contract with Outotec, it ultimately chose not to with MW instead assigning the sub-contract to Energy Works in accordance with its contract.

Energy Works subsequently commenced proceedings against MW, seeking damages as a result of the delay to the works, losses arising from termination and costs incurred as a result of engaging others to complete the project. MW subsequently added Outotec as a Part 20 defendant, stating that Energy Works’ losses stemmed from Outotec’s breach of sub-contract.

Issues

As part of the proceedings, the court was asked to consider whether Energy Works retained the benefit of the accrued rights against Outotec.

If this was not the case, the court was asked to consider whether MW’s assignment of the sub-contract meant they had transferred both the benefit and burden of the sub-contract to Energy Works instead. This would mean that the assignment had taken effect as if it had been novated instead, conferring on Energy Works a number of obligations which previously would have been the responsibility of MW. Practically this limited the recovery capable by Energy Works under the sub-contract.

Decision

The court held that the assignment transferred both the contractor’s accrued and future rights under the sub-contract to Energy Works. Further to this, the court also confirmed that the assignment of the sub-contract did not transfer MW’s obligations to Energy Works.

In reaching his decision, Mrs Justice O’Farrell stated that, in the absence of any clear contrary intention, where a contract refers to assignment, the parties should interpret this to mean the assignment of the benefit of the contract including accrued and future rights.

O’Farrell J went on further however to state that, while it is possible to assign future rights under a contract without the accrued rights, it is important for a contract to expressly state this is the case in order for this to take effect. 

Conclusion

Though the decision in Energy Works is unsurprising, it does provide clarity surrounding the interpretation of contractual provisions around assignment. It also remains vital that parties to a contract are aware of the consequences of assignment in light of this.

Contractors in particular should be alert to the fact that, by assigning a sub-contract to a developer, they may forfeit their right to pursue the sub-contractor for a breach of contract – leaving them financially liable for the cost of rectification.

While the court in Energy Works envisioned this as a potential issue for contractors and suggested that assignment provisions be drafted such that only future rights are assigned to a third party, this will only be effective where an employer is willing to take assignment of the sub-contract under such conditions. Given assignment provisions give employers and other third parties significant comfort knowing they can pursue a sub-contractor for any issues which may arise, it remains unlikely that express restrictions such as these will be agreed to whole heartedly. Whether the industry will look to adopt a new approach to assignment in light of this remains to be seen…

Contact our experts for further advice

View profile for Christopher LambChristopher Lamb

Search our site