Novation agreement

[edit] Introduction

A novation agreement is the process whereby contractual rights and obligations (i.e both benefits and burdens) of a contract are transferred from one party to another.

A novation occurs when there is a rescission (i.e rescinding or terminating) of one contract with 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 usual in design and build projects, where the design team is appointed by a client to carry out initial studies or prepare a concept or detailed design. When subsequently 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 the contractor.

[edit] The agreement

Novation and the form of novation agreement must be agreed at the outset when consultants are appointed otherwise the consultants are under no obligation to agree to be novated. Consent from all parties is required for novation and so the agreement is usually tripartite, between the employer (client), consultant and contractor.

It is essential that novation agreements are drawn up correctly, with the principal contracts between client and consultants, and between client and contractors containing express terms obliging the contractor and the consultant to enter into the novation agreement. A specimen form of the proposed novation agreement should be appended to the original contractual documentation otherwise there is a risk of creating an agreement which is unenforceable.

As with any contract, clear and unambiguous wording must be used to deal with the parties’ intentions on releasing the ‘client’ and the ‘consultant’ and creating the new rights between the ‘consultant’ and the ‘contractor’.

If novation is not planned when negotiating consultants’ appointments at the outset, it could be worthwhile to allow for its possibility at some future time and so it would not be bad practice to insert clauses that allow for it.

Any novation documentation must be properly drawn up and must stipulate clearly which services consultants will perform 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).

Typically, novation agreements replicate the terms of the original contract, i.e the same terms apply to the new parties. However, it is possible to vary the existing terms if necessary, by inserting appropriate clauses into the novation agreement.

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 contractors do 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).

Prior to entering a novation agreement, it is essential that all parties seek legal advice.

[edit] Related articles on Designing Buildings

• Architect.
• Appointing consultants.
• Assignment.
• Assignment of debt.
• Blyth & Blyth Ltd v Carillion Construction Ltd.
• Collateral warranties.
• Concept design.
• Consultants.
• Consultant switch.
• Designers.
• Design and build.
• Design and build - pros and cons.
• Detailed design.
• Difference between assignment and novation.
• Joinder.
• Privity of contract.
• Procurement route.
• The Contracts (Rights of Third Parties) Act.

[edit] External references

• PACE Guidance on the Appointment of Consultants and Contractors P126 guidance on novation.
• Building article: Novation without tears.