Novation

[edit] Introduction

Novation is a process by which contractual rights and obligations are transferred from one party to another. Whilst the benefits of a contract can be transferred by assignment, if the parties wish to transfer both the benefits and the burdens then this must be done by a novation agreement.

A novation occurs when there is a rescission of one contract and the substitution of a fresh contract in which the original contractual obligations are carried out by different parties. In building design and construction, novation normally refers to the process by which design consultants are initially contracted to the client, but are then 'novated' to the contractor.

This is common on design and build projects where the design team are appointed by a client to carry out initial studies or prepare a concept or detailed design, but then when a contractor is appointed to carry out or complete the design and construct the works, the design team (or part of it) is novated to work for them.

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

NB. The process of novation in itself does not make a contractor responsible for any design carried out for the client prior to novating their contract. To achieve this the building contract needs to specifically state that the contractor has examined the design and adopted it.

[edit] Documentation

A novation agreement is not possible without consent. If novation and the form of novation agreement were not agreed when the consultant’s was initially appointed, they are under no obligation to agree to be novated. It is essential therefore that the principal contracts between client and consultants and between client and contractors contain express terms obliging the contractor and the consultant to enter into the novation agreement.

To avoid the risk of merely having an agreement to agree which is unenforceable, a specimen form of the proposed novation agreement should be appended to the original contractual documentation.

It is important that any novation documentation is properly drawn up and that it makes clear which services consultants performed for the client and which they will now perform for the contractor, otherwise initial appointment agreements may be rendered meaningless, for example a requirement for the consultant to inspect the contractor's work and report to the client (when they are in fact now appointed by the contractor).

The process of novation can leave designers feeling they have mixed loyalties and there can be difficulty determining where liability lies for design work carried out before novation. If the contractor does not take on the design team effectively as if they had been the employer from the beginning therefore, it may be wise for them to obtain warranties for pre-novation services from the designers. The client may also require collateral warranties from novated designers (see Blyth & Blyth Ltd v Carillion Construction Ltd).

[edit] Consultant switch

As an alternative to novation, there may be a 'consultant switch', which simply transfers the consultants from working for the client to working for the contractor, without altering the contractual history.

When there is a consultant switch, the original agreement between the consultant and the client terminates on appointment of the contractor, and there is then a new agreement between the contractor and the consultant.

This can be seen to provide better clarity of the contractual relationships. However, because the consultant’s liability to the client for pre-switch services remains, some argue that there is a greater risk of conflict of interest.

For more information see: Consultant switch.