UK: Novation: Principles and Pitfalls

NOVATION

First, it is necessary to distinguish between three concepts: sub-contracting, assignment and novation.

  1. Sub-contracting
  2. In many contracts it is immaterial as to whether a party to the contract performs his obligations himself or those obligations are performed by someone else (the sub-contractor), vicariously on behalf of the original party. The original contractor remains liable for his obligations under the contract because the burden or performance of a contract may not be assigned.

  3. Assignment
  4. This consists of the transfer from B to C of the benefit of one or more contractual obligations that A owes to B. It is not the obligation to perform which is assigned, but the benefit of the performance. The original contract between A and B remains in existence and is unchanged. Consent is not required to give effect to an assignment. Once A has received notice of the assignment, A is bound by it, therefore if the benefit B assigns to C is the money A owes to B for B’s performance of the contract between A and B, then A is bound to make payment to C in respect of the notice of assignment.

  5. Novation

This is the process by which a contract between A and B is transformed into a contract between A and C. It can only be achieved by agreement between all three of them, A, B and C. Unless there is such an agreement, neither A nor B can rid himself of any obligation which he owes to the other under the contract. This is commonly expressed in the proposition that the burden of a contract cannot be assigned, unilaterally. If A is entitled to look to B for performance of the contract, he cannot be compelled to look to C for performance instead, unless there is a novation.

In recent years employers have attempted to have the best of both worlds by engaging their own consultants prior to the appointment of the design and build contractor. These consultants are then novated to the design and build contractor who accepts entire responsibility for the design including any design carried out by the consultants prior to their appointment. This gives rise to a situation which has obvious differences from the classic novation. The employer and the contractor have different interests in the development. The employer does not drop out of the picture, as in the classic novation, but instead retains its interest in the project. The obligations of the consultant change, even if the novation does not expressly state this. The services the consultant would have performed for the employer will differ from those required by the contractor.

A number of issues arise as a result:

  1. What is being novated?
  2. What is the consultant’s liability?
  3. Problems of conflict of interest.

All the above problems are amply illustrated in the case of Blyth & Blyth Limited v Carillion Construction Ltd [2001] 79 Con LR 142. In this case, involving the design and construction of a leisure development in Edinburgh, a novation agreement, which purported to place upon the consultant responsibility for all services performed prior to the novation as services performed for the contractor. The consultant commenced proceedings against the contractor for non-payment of fees. The contractor counter-claimed for breaches of contract which occurred prior to the novation. The court decided that the contractor could not bring proceedings against the consultant, because the contractor had suffered no loss for which the consultant owed a duty to the contractor.

The novation agreement in Blyth & Blyth contained, (and Carillion relied upon), the following clauses to argue that the scope of the consultant’s duty was owed to them rather than the original employer :

The liability of the Consultant under the Appointment whether accruing before or after the date of this Novation shall be to the Contractor and the Consultant agrees to perform the Appointment and be bound by the terms of the Appointment in all respects as if the Contractor had always been named as a party to the Appointment in place of the Employer.

Without prejudice to the generality of clause 3 of this Novation the Consultant agrees that any services performed under the appointment by the Consultant or payments made pursuant to the Appointment by the Employer to the Consultant before the date of this Novation will be treated as services performed for or payments made by the Contractor and the Consultant agrees to be liable to the Contractor in respect of all such services and in respect of any breach of the Appointment occurring before the date of this Novation as if the Contractor had always been named as a party to the Appointment in place of the Employer.

Carillion’s claims based on the above clauses were firstly that the contract was in effect re-written with the word "Employer" being substituted for "Contractor". This, as the Judge pointed out, led to nonsensical results, and conflicts of interest would arise advising on the one hand an employer and on the other hand a contractor. As a consequence the Judge considered it inherently unlikely that the intention was to "re-cast the duty owed and performed to the employer as being a duty owed to the contractor retrospectively".

Carillion’s counsel accepted this must be so, and therefore Carillion relied upon their second argument namely that the consultant had breached the terms of its appointment by failing in duties that it owed to the Employer, these breaches being deficiencies in the Employer’s Requirements which led to Carillion’s tender being too low, and as Carillion had accepted responsibility for the design of the Employer’s Requirements they had to bear this loss. However, this argument was doomed if the consultant’s duties were not re-cast retrospectively.

The decision leaves contractors in a difficult position as they are being required to take liability for the design of the works without having recourse to the designers who have prepared the design. The problem can be overcome by the designer acknowledging that it knew the contractor would rely upon its design in the preparation of its tender prices, but potentially this exposes the consultant to a conflict of interest and is, in any event, resisted by the Professional Indemnity insurers.

This case has now led to the publication of two standard forms. The first is the City of London Law Society (Construction Committee) standard form which has been published with its guidance notes which include a broad discussion of the need, timing and content of a Deed of Novation. It also includes a clause similar to Clause 4 which deals with Blyth & Blyth issues. The second is issued by the CIC which has moved away from a novation ab initio which the CIC think is a fiction, to an arrangement where the consultant warrants the pre-novation services to the Contractor, as well as promising to perform the post-novation services.

Step-in, Novation or Quasi-Novation Provisions

Collateral warranties contain step-in, novation or quasi-novation provisions of the kind familiar to users of the BPF funder warranty. The clauses usually contain a provision which applies if the agreement between the funder and the employer for financing the works (the "finance agreement") has been terminated. The funder gives notice of this to the contractor.

The contractor is entitled (and should perhaps be required) to rely on the funder's notice as evidence of termination of the finance agreement. Typically the grounds for termination of a finance agreement by the funder are the failure to fulfil any precondition, serious and uncorrected breaches by the employer, and the employer's insolvency.

The second provision applies if the contractor wishes to determine his employment under the building contract, or to treat the building contract as having been repudiated by the employer. In either case the contractor must give notice to the funder, who may (within an agreed period) give a counter-notice to the contractor; and meanwhile the contractor must stay his hand.

In either case, that is, whether the funder gives the contractor (a) notice of termination of the finance agreement or (b) a counter-notice in response to the contractor's notice of intention to determine or to treat the building contract as repudiated, the funder's notice or counter-notice will require the contractor to accept the instructions of the funder "or its appointee" to the exclusion of the employer in respect of the works upon the terms and conditions of the building contract.

It is debatable whether or not this mechanism constitutes a novation of the building contract. Under a straightforward novation, a new building contract would come into being in place of the original one; the new contract would be between the funder and the contractor, and would be deemed to have existed ab initio. However, the funder's notice does not appear to bring about any such new contract; nor does it discharge the original contract. In fact there are frequently provisions which preserve the contractor's liability to the employer for any breach of the original building contract, and make it clear that the original building contract continues in full force and effect.

To complicate matters further, there is frequently a proviso which says that nothing shall relieve the contractor of any liability he may have to the employer for any breach by the contractor of the building contract while at the same time making it clear that upon the issue of any notice by the funder the contractor shall be liable to the funder under the building contract in lieu of its liability to the employer. The intention appears to be that the contractor remains liable to the employer for any loss occasioned to the employer by the contractor's breaches of the building contract occurring before the funder's notice or counter-notice; and that the contractor becomes liable to the funder for breaches occurring after the notice or counter-notice.

What then happens if the funder's notice does not lead to a straightforward novation? Analysing the position, it would appear that the original building contract continues in force on the basis that the employer and contractor have given the funder, vis-à-vis all parties, full and irrevocable authority to issue instructions to the contractor as permitted by the contract, directly or via the architect or contract administrator. The contractor remains liable to the employer for any loss occasioned to the employer by the contractor's prior breaches. The contractor becomes liable to the funder, but not to the employer, for future breaches. The funder becomes liable to the contractor for all sums owed to the contractor by the employer, including sums outstanding at the moment of step-in.

The funder’s warranty therefore becomes supplemental (as well as collateral) to the building contract, and for interpretation of the building contract both agreements must be read together. The step-in rights in the warranty are thus not a true novation, which would involve the discharge of one contract and the formation of a new contract, but a quasi novation.

Conclusion

Novation only gives limited protection to the contractor against the risks that it takes when being responsible for the design prepared by the employer’s consultant.

The employer loses the benefit of the services of its consultant following novation and, indeed, the consultant may be required to act against the employer’s interests.

Novation should, in theory, cause no problems for the consultant, providing the novation agreement does not cause any retrospective variation in the scope of its duties or conflicts of interests.

Following the Blyth & Blyth case, it is important for the parties to consider carefully the lists of services to be inserted in the appointment and exclude services or limit services to the pre-novation period which cannot be regarded as being performed for the contractor.

Novation of consultants and design and build contracts is now an accepted practice, and appears to benefit both the employer and the contractor provided its limitations are recognised and the novation is properly drafted.

This is an edited version of an article written by Matthew Needham-Laing taken from the Fenwick Elliott website. To see the full version please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions