With central government pursuing structural reform, local government reorganisation is a continued factor for consideration in contracts.

For both outgoing and successor authorities involved in long-term public sector construction projects, reorganisation creates a deceptively straightforward problem: the entity that signed the contract may cease to exist, yet the obligations it has assumed do not. Without adequate contractual protection and governance preparation, questions may arise over the allocation of liability, continuity of performance and financial exposure.

Whether an existing council is merged or dissolved, ultimately the original legal contracting entity is affected. The contractual rights and obligations of the original council entity pass to a successor body by operation of statute or statutory order. The practical question for authorities (both outgoing and incoming) is whether that transfer occurs automatically under their contract, is adequately planned for and governed in a manner that protects the public interest and the council’s legal position. 

Contractual implications

The default statutory mechanism for transferring obligations upon reorganisation is broadly similar to a statutory assignment. This means contractual rights may transfer, but the original contractor's position is fundamentally altered: a new counterparty stands in the shoes of the original employer, typically without any requirement to seek the contractor's consent. This raises a number of concerns. Assignment (statutory or otherwise) does not, at common law, transfer burdens in the same way as novation. Disputes may therefore arise as to which authority is liable for pre-reorganisation works, variations or retention releases. Moreover, assignment does not extinguish the original party's obligations in the same clean fashion as novation, potentially leaving unclear chains of liability across the reorganisation boundary.

Novation, by contrast, extinguishes the original contract and replaces it with a new one between the contractor and the successor authority on the same or agreed terms. The outgoing council, incoming council and contractor must all be parties to the novation agreement, ensuring that obligations transfer clearly, liabilities are allocated and the contractor has a voice in the process. The novation agreement will therefore need to be coordinated with the reorganisation itself, requiring authorities to carry out due diligence on live contracts before the transfer date.

Why novate?

Councils face real risks when construction contracts transfer by default statutory mechanisms without express agreement on the allocation of pre-transfer and post-transfer liability. A successor authority that inherits a mid-programme contract without clarity on outstanding retention, disputed variations or interim payment obligations is financially and operationally exposed. An outgoing council, meanwhile, risks residual liability for matters it can no longer manage, having transferred its governance functions to the successor body.

Novation directly addresses these concerns. By requiring express agreement between all three parties, it compels both authorities to confront the contractual position in detail before the transfer takes effect.

Local government reorganisation will continue to affect live construction projects. A bespoke clause, rather than reliance on a general assignment provision, provides clear protection, ensuring continuity of obligations within a contractual framework that reflects the practical realities of structural local government reform. For more information on how local government reorganisation affects construction contracts, you can reach out to our expert public contracts, projects and funding team.