Last edited 22 Sep 2015

Blyth & Blyth Ltd v Carillion Construction Ltd

The meaning and effect of a novation agreement, in particular the characteristics of claims for losses arising prior to the novation, was considered by the Scottish Court of Session in the case of Blyth & Blyth Ltd v Carillion Construction Ltd (2001).

The facts concerned the novation to the contractor of the terms of appointment between an employer and a consulting engineer for the construction of a leisure complex near Edinburgh. After the novation agreement, disputes arose between the engineer and the contractor, the engineer claiming for unpaid professional fees and the contractor counterclaiming for additional construction costs incurred by them arising from alleged inaccuracies or insufficiencies of information supplied by the engineer, initially to the employer, forming part of the tender documentation provided by the employer to the contractor.

The construction contract was the JCT Standard Form of Building Contract with Contractors Design 1981 Edition amended to provide that the contractor should assume responsibility for the design of the works, whether undertaken before or after the execution of the contract. The contractor's primary position taken in their pleadings, but nor pursued at trial, was that the novation agreement was to 're-write' the terms of appointment between the employer and the engineer, substituting 'contractor' for 'employer'.

At trial, the contractor submitted that the novation agreement did not effect a 're-writing' of the terms of appointment; all that occurred on novation was that the contractor became the creditor of the obligation, but the content of the obligation owed by the consultant engineer, to provide advice or services to the employer, remained unaltered. The contractor further submitted that as they had retroactively become a party to a contract as creditors of the obligation, they had contracted with the engineers for the provision of services to a third party, the employer, and if those services were not properly performed, the contractors were entitled to claim their own losses.

Lord Eassie described the issue as follows:

'One ought, accordingly, to examine the legally logical position of the defender's analysis to the effect that the Novation Agreement produced an essentially three-sided relationship whereby A (contractor) engages B (consultant) to perform services for, and give advice to, C (employer). Accepting for the moment that analysis to be correct, the questions which arise are whether the sufficiency of the performance by B (consultant) is to be judged by what is required by the destinee of the services C (the employer) and whether in the event of defective performance the losses or costs for which B (consultant) may be liable in damages are those reflecting the need to put C (employer) in the position of having received satisfactory service, or, as the (contractors) contend, those said to have been suffered by A (contractor).’

Lord Eassie found that on a proper construction of the novation agreement, the contractors could not claim for their own losses caused by breaches by the engineers prior to the date of novation in relation to the duties then owed by the engineer to the employer, the losses sought by the contractors not being losses conceived as having been suffered by the employer.

As a consequence contractors have had to protect themselves with appropriate contractual conditions where they are taking over the responsibility of the design process by way of a novation (such as BPF and CIC novation agreements) and may consider entering into appropriately worded collateral warranties with design teams to protect themselves from pre-novation losses.