Novation

Presented ByLaughlan Steer, Senior Associate

Novation

Presented By:Laughlan Steer, Senior AssociateLaughlan’s experience spans both non-contentious and contentiousconstruction matters and he advises an array of clients, including employers,architects, contractors and sub-contractors. He particularly enjoys providingassistance to clients in scenarios of power imbalanceLaughlan is experienced in the preparation, review and negotiation of contractamendments and ancillary documents, including consultants’ appointmentsand collateral warranties. His non-contentious construction experienceincludes advising on:• Several national homebuilders’ projects including essential housing• Student accommodation• High value domestic renovations• Renewable energy site acquisition and developmentLaughlan regularly advises on disputes relating to defects, delays and finalaccount valuations in both adjudications and litigation (including enforcementproceedings). He has also acted in a number of successful mediationsIn addition he frequently contributes articles on construction law to tradepublications and our website, and regularly provides training and seminars toclients and construction industry professionalsTel: 0207 167 6602 Email: laughlansteer@silverllp.com

Novation

Agenda• Novation• Novation Vs Assignment• Novation By Conduct• Novation Of Part• Failure To Complete A Novation Agreement• Repudiatory Breach In Novation• Dispute Resolution Options

Novation

Novation is a tri-partite agreement between three parties, whereinboth the benefits and the burdens of a contract are transferred

Employer

ContractorConsultant

Employer

Consultant

ContractorNovation Agreement

Novation Vs AssignmentNovation and Assignment are vitally different:• Where an assignment only transfers the rights of a contract, a

novation also transfers the obligations• An assignment does not require the consent of the parties to take

place, unless specified by the contract. A novation always requiresthe consent of all the parties

• A novation occurs when there is a rescission of one contract andthe substitution of a fresh contract in which the originalcontractual obligations are carried out by different parties. Inbuilding design and construction, novation normally refers to theprocess by which design consultants are initially contracted to theclient, but are then 'novated' to the contractor

NovationOn design and build projects the design team is commonlyappointed by a client to carry out initial studies or prepare aconcept or detailed design, and when a contractor is appointed tocarry out or complete the design and construct the works, thedesign team (or part of it) is novated to work for them

This can be beneficial to clients as it maintains continuity betweenpre-tender and post-tender design whilst leaving sole responsibilityfor designing and building the project with the contractor.Novation effectively over-writes the contractual history to give theimpression that the consultant has worked for the contractorthroughout the project

NovationNovation requires consent - if novation and the form of novationagreement were not agreed when the consultant was initiallyappointed, they are under no obligation to be novated. It isessential therefore that the principal contracts between client andconsultants and between client and contractors contain expressterms obliging the contractor and the consultant to enter into thenovation agreement

To avoid the risk of merely having an agreement to agree, aspecimen form of the proposed novation agreement should beappended to the original contractual documentation

Novation

It is important that any novation documentation is properly drawnup and that it makes clear which services consultants performedfor the client and which they will now perform for the contractor,otherwise initial appointment agreements may be renderedmeaningless

For example a requirement for the consultant to inspect thecontractor's work and report to the client (when they are in factnow appointed by the contractor)

Novation

The process of novation can leave designers feeling they havemixed loyalties, especially in respect of where liability lies fordesign work carried out before novation

If the contractor does not take on the design team as if they hadbeen the employer from the beginning, it may be wise for them toobtain warranties for pre-novation services from the designers

The client may also require collateral warranties from novateddesigners (see Blyth & Blyth Ltd v Carillion Construction Ltd)

Consultant Switch

The original agreement between the consultant and the clientterminates on appointment of the contractor, resulting in a newagreement between the contractor and the consultant

However, because the consultant’s liability to the client for pre-switch services remains, some argue that there is a greater risk ofconflict of interest

NovationBlyth & Blyth v Carillion Construction (2001) 2002 S.L.T.961

The Employer (THI Leisure) appointed Blyth & Blyth as EngineersWhile appointed by the Employer, Blyth & Blyth prepared thetechnical information for the tenders to be used to engage theBuilding Contractor, and underestimated the amount of steelreinforcement required in the worksThe underestimated figure was included in the bills in the BuildingContractor’s tender and subsequently incorporated into theBuilding Contract (between THI Leisure and Carillion)

NovationBlyth & Blyth v Carillion Construction (2001) 2002 S.L.T.961

Under the Deed of Appointment, Blyth & Blyth were required toenter into a Novation Agreement with Carillion

Inaccuracies or deficiencies were contained in the pre-tenderinformation prepared by Blyth & Blyth

Carillion relied on such information in tendering for the buildingcontract and after such inaccuracies were discovered it incurredextra costs which it sought to recover from Blyth & Blyth

Novation

Blyth & Blyth v Carillion Construction (2001) 2002 S.L.T.961

Carillion claimed that Blyth & Blyth had breached contractualduties owed to the Employer, THI, under the Deed ofAppointment, occurring before the date of the NovationAgreement i.e. Carillion were seeking to recover losses in relationto pre-Novation breaches.

NovationBlyth & Blyth v Carillion Construction (2001) 2002 S.L.T.961

The court held that the Carillion did not have the right to recoversuch losses, based on an alleged breach of duty by Blyth & Blyth,committed prior to the date of Novation and in relation to dutiesthen owed to THI

The court’s reasoning behind this decision was, that as Carillionwere engaged on a fixed price building contract and, as THI hadsuffered no loss as a result of the inaccuracies of the consultant’spre-tender information, Carillion could not, by virtue of theNovation, claim for such losses

Novation

Blyth & Blyth v Carillion Construction (2001) 2002 S.L.T.961On a proper construction of the novation agreement, the Contractor could notclaim for its own losses caused by breaches by the Engineer prior to the dateof novation in relation to the duties then owed by the Engineer to theEmployer. The losses sought by the Contractor were not being lossesconceived as having been suffered by the Employer. Novation does notretrospectively change obligations that have already been performed

Consequently contractors need to protect themselves with appropriatecontractual conditions where they are taking over the responsibility of thedesign by way of a novation. They may also consider entering into collateralwarranties with design teams to protect themselves from pre-novation losses

Did A Novation Take Place?Camillin Denny Architects Ltd v Adelaide Jones &Company Ltd [2009] EWHC 2110 (TCC)

In February 2008, Camillin Denny Architects Ltd (the Architect) wasretained by Adelaide Jones & Co Ltd (the Employer) to providearchitectural services relating to a refurbishment and renovation ofa building in Mayfair

The architectural services included the feasibility, design, tenderand construction phases of the project but did not include contractadministration or project management, the fee was to be £425,000plus VAT

Did A Novation Take Place?

Camillin Denny Architects Ltd v Adelaide Jones &Company Ltd [2009] EWHC 2110 (TCC)

The contract was evidenced by two letters (the Architect's letter of1 February 2008 and the employer's letter of 4 February 2008) andexpressly incorporated the Royal Institute of BritishArchitects (RIBA) Standard Form of Agreement for Appointment ofan Architect. The contract included an adjudication clause

Did A Novation Take Place?Camillin Denny Architects Ltd v Adelaide Jones &Company Ltd [2009] EWHC 2110 (TCC)The parties held discussions and exchanged correspondencebetween July and September 2008 regarding a possible novation ofthe contract from the Employer to another company, EuroConstructions. The Employer also considered extending thearchitectural services to include contract administration andmanagement of the project. The Architect proposed a revised fee.

On 12 September 2008, at a meeting between the parties, theyfailed to reach a new agreement

Did A Novation Take Place?Camillin Denny Architects Ltd v Adelaide Jones &Company Ltd [2009] EWHC 2110 (TCC)By letter dated 17 February 2009, the Employer terminated theArchitect's employment. The Architect sought to recover its fees,amounting to £131,161 (including VAT) and issued a notice ofadjudication on 23 April 2009

The Employer challenged the Adjudicator's jurisdiction, arguingthat as a novation took effect in August 2008 (which was backdatedto 1 February 2008), the Employer was not the correct party to theadjudication, instead, the Architect should pursue EuroConstructions. The Employer reserved its right to challenge theAdjudicator's jurisdiction in any subsequent enforcementproceedings

Did A Novation Take Place?Camillin Denny Architects Ltd v Adelaide Jones &Company Ltd [2009] EWHC 2110 (TCC)The Adjudicator rejected the Employer’s novation arguments andmade an award in favour of the Architect. The Employer did notcomply with the decision and the Architect issued enforcementproceedings

In the enforcement proceedings, the Employer maintained that theAdjudicator had no jurisdiction because of the novation to EuroConstructions in August 2008. Akenhead J rejected the Employer'sarguments and enforced the Adjudicator's decision by way ofSummary Judgment

Did A Novation Take Place?

Camillin Denny Architects Ltd v Adelaide Jones &Company Ltd [2009] EWHC 2110 (TCC)

This was a case where the Courts concluded that there was not asufficient agreement between the parties for a novation to havetaken place

However, there are circumstances where a novation can be implied

Novation By ConductChatsworth Investments Ltd v Cussins (Contractors) Ltd[1969] 1 WLR 1

The claimants engaged a building firm to undertake the erection ofa building. The building firm, in turn, arranged for part of the workto be undertaken by subcontractors

The building was completed in 1962. In 1963 the building firmassigned its assets to the defendants (the subcontractor) whoundertook to discharge all the firm's liabilities. The defendantsthen assumed the original name of the building firm

Novation By ConductChatsworth Investments Ltd v Cussins (Contractors) Ltd[1969] 1 WLR 1

Subsequently, in August 1966 the claimants issued a writ claimingdamages for defects which had appeared in the building. This wasserved on the defendants in 1967. In January 1968, the defendantsput in a defence to the effect that they were not parties to theoriginal contract

In April, the claimants applied to amend their statement of claim toallege that there was a novation to be implied whereby thedefendants made a new contract with the claimants to take overthe liabilities of the original building firm

Novation By Conduct

Chatsworth Investments Ltd v Cussins (Contractors) Ltd[1969] 1 WLR 1

The Defendant sought to argue that:

“We are not the people with whom you contracted in 1960,although we bear the self-same name. We are a differentcompany. We did not take over until 1963. We took anassignment of the assets and we agreed to discharge theliabilities. But we did not make that contract with you”

Novation By ConductChatsworth Investments Ltd v Cussins (Contractors) Ltd [1969]1 WLR 1

Lord Denning disagreed, making the following finding:

“On the face of it, that looked like a complete defence. To overcomethe difficulty, the plaintiffs applied for leave to amend their claim. Theywished to allege that there was a novation whereby the secondcompany, if I may call it so, Cussins (Contractors) Limited (No. 2) madea new agreement with them to take over and to be responsible to theplaintiffs for the liability of Cussins (Contractors) Limited (No. 1). Theysaid that this novation was to be implied from all the circumstances ofthe case. The defendants objected to the proposed amendment. Theysaid that the alleged novation was too tenuous and was wanting inparticularity. There is nothing in this objection. It would be very easy toinfer a novation from the circumstances of this case.”

Novation By Conduct

Chatsworth Investments Ltd v Cussins (Contractors) Ltd[1969] 1 WLR 1

While this case took place fifty years ago, its findings were echoedby Coulson J obiter dicta in Enterprise Managed Services Ltd vMcFadden Utilities Ltd [2009] EWHC 3222

It is clear from these cases that while ordinarily a clear novationagreement is required, it is possible for an agreement to be impliedbased on the circumstances

Novation Of PartLangston Group Corp v Cardiff City Football Club Ltd[2008] EWHC 535 (Ch)The High Court considered a variation to a contract between A andB, whereby A and B agreed that C would perform some of B'sobligations

Briggs J stated obiter that: Although the variation agreement did notuse the word "novation" and did not describe itself as a novationagreement, substituting C for B required a novation. The variationagreement was, in fact, a novation agreement

Novation Of PartLangston Group Corp v Cardiff City Football Club Ltd[2008] EWHC 535 (Ch)A variation agreement that substituted one party for another foronly some of the obligations under an existing contract did notautomatically take effect by extinguishing the whole of the originalcontract and replacing it with another.He gave the example of a contract between A and B with tenobligations, where A and B agreed afterwards that just one of theobligations would now be performed by C. That second agreement,although it would be a novation agreement, would not take effectas extinguishing the whole contract and creating a new contract denovo.

Failure To Complete A Novation Agreement

Galliford Try Infrastructure Ltd v Mott MacDonald [2008]EWHC 1570 (TCC)Galliford Try (G) was retained by a building development company(S) in January 2000 to be the design and build contractor of theredevelopment of the former Victorian Birmingham Children'sHospital

Mott MacDonald (M) had been retained by a wholly ownedsubsidiary of S (L) in 1998 to provide structural and buildingengineering services, including major elements of the design forthe project

Failure To Complete A Novation Agreement

Galliford Try Infrastructure Ltd v Mott MacDonald [2008]EWHC 1570 (TCC)During 1999 and in the period leading up to G being retained, Gand M had begun to directly liaise on the project. Shortly before Gwas retained, it employed a sub-contractor (R) to carry out andtake over responsibility for the steelwork design in place of M

Discussions and negotiations took place in relation to novating M'scontract with S to G, upon G being retained, but irreconcilabledifferences between the parties led to the novation agreementnever being agreed and thus no contract existed between G and M.The project was completed substantially later than anticipated

Failure To Complete A Novation Agreement

Galliford Try Infrastructure Ltd v Mott MacDonald [2008]EWHC 1570 (TCC)

G tried to recover losses from M, however the Court found that thenovation had not taken place. Without an effective novationagreement between G, M, and S, G did not have a contract with M.G had to try and bring a claim in tort and its claim was unsuccessful

Just because G had planned to enact the novation, this was notsufficient - there must be a clear agreement between the parties

Galliford Diagram

G M

M

S

G

S

G

Attempted torecover losses

MR

Planned Novation

R

L L

No contract between G

& Mas novation

wasnever

formalised,so no claim

S = Building Development CompanyG = Galliford TryM = Mott MacDonaldR = Other sub-contractorL = Subsidiary of S

Repudiatory Breach In Novation?Quest Advisors Limited & Another v McFeely [2009]EWHC 2651

It was argued that an attempt to transfer contractual obligationswithout first seeking the other party's consent is a repudiatorybreach of contract

The Court held that, on the facts, the purported transfer had notdemonstrated an intention on the part of the would-be transferorto reject the contract and its obligations under it; instead, it hadtaken the honest but wrong belief that the transferee was liable toperform the relevant obligations in its place

Repudiatory Breach In Novation?Quest Advisors Limited & Another v McFeely [2009]EWHC 2651As there was no reason to suppose that the would-be transferorwould refuse to perform its obligations if the court held that itremained bound by the agreement, no repudiation had beenestablishedHowever, in other circumstances, for instance, if, following a finaldecision in the proceedings, the would-be transferor persisted inarguing that its obligations had been transferred, the would-betransferor's actions might be capable of amounting to repudiatoryconduct. By analogy, it would appear that serving notice of"novation" in an attempt to gain consent will not of itself constitutea repudiatory breach, although, if the continuing party withholdsconsent, continuing to act as though novation had taken placecould amount to repudiatory breach

Novation

Dispute Resolution - Adjudication

CONCLUSION

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