Changing contracts, shifting liability?

When the concept of design and build was introduced, it was intended that contractors would use their own in-house design team or appoint 'outside' consultants. However, one of the perceived disadvantages of the design and build procurement method is that the employer loses control over the quality of the development when delegating design responsibilities to contractors at an early stage in the design process.

In order to overcome this apparent disadvantage, many employers originally engage the design team up to perhaps the detailed design stage and then pass over – or novate – the appointments of the relevant designers to the contractor.

This is usually done by means of novating the original design team's appointments from the employer to the contractor. A novation is a tri-partite agreement under which an existing contract between two parties (ie the employer and the designer) is discharged and a fresh contract is made between one of the parties to the original contract and a third party (ie the contractor and the designer), usually on the same terms as the original contract. A recent case (Blyth and Blyth Ltd v Carillion Construction Ltd) illustrates the potential problem in considering the respective rights and obligations of the parties in such a situation.

Facts
THI Leisure (Fountainpark) Ltd, as employer, appointed Blyth and Blyth Ltd (BBL) to provide engineering services on a leisure development. THI also appointed Carillion Construction Ltd, as contractor, under the JCT Standard Form of Building Contract with Contractor's Design 1981 edition incorporating amendments.

Carillion undertook responsibility for the design of the works included in the employer's requirements. The appointment empowered THI to require BBL to enter into a novation agreement and at a later date a tripartite agreement was entered into between the parties (the novation agreement).

BBL brought an action for payment of their fees against Carillion. When preparing their tender, Carillion relied on the information prepared by BBL for THI (contained in the employer's requirements). Solely for the purposes of the argument before it, the court accepted that this information was, hypothetically, deficient (constituting a pre-novation breach). This resulted, Carillion argued, in their having to provide more materials than they had made provision for and hence was an additional cost which they sought to recover, by way of counter-claim, from BBL (this was referred to as a pre-novation loss).

Novation agreement
Clause 4 of the novation agreement provided that the liability of BBL under the appointment, whether accruing before or after the date of the novation agreement, would be to Carillion with BBL agreeing to perform and be bound by the terms of the appointment in all respects as though Carillion had always been named as a party to the appointment in place of THI. Clause 5 provided that BBL agreed that any pre-novation services or payments made to them by THI would be treated as services performed for, or payments made by, Carillion and BBL agreed to be liable to Carillion in respect of such pre-novation services "as if Carillion had always been named as a party to the Appointment in place of THI".

Retroactive effect
Before the court, Carillion asserted that, assuming the service or advice provided to THI contained errors, which amounted to a pre-novation breach, then THI would be contractually entitled to have the errors corrected or the consequences made good. Post-novation, Carillion was the party entitled to call for such breaches to be made good. As a result, Carillion asserted that they were entitled to claim for their own losses.

Ascertaining loss
BBL's lawyers asserted that the "natural and obvious" way to ascertain loss for performance of a deficient service was to consider the extent to which the person for whom the service was provided suffered loss as a result of that deficiency. The person for whom the service was provided pre-novation was THI, as employer. It was, therefore, THI's (as opposed to Carillion's) loss which was properly in issue. BBL went on to assert that, while the novation agreement may be said to have transferred the liability of BBL to Carillion, the question was – liability for what? BBL's answer to this was that since the breach was pre-novation, at that time the service could only have been owed to THI (as employer) and the loss could, therefore, only be measured as a loss to THI in such a capacity.

Decision
The court rejected Carillion's argument. The court held that Carillion could not recover their own pre-novation losses. If the service was to be performed for the employer, the adequacy of that performance must be tested by reference to the extent to which the employer did not receive proper service and the measure of any loss was the amount required to make good that deficiency to the employer.

Comment
It is worth noting that this case was decided in the Scottish courts and as such may be of persuasive, but not necessarily binding, authority.

The court rejected the argument, put forward by the contractor, that there was no need for it to obtain the advice of its own engineering staff to evaluate the information put forward by THI's designer pre-novation as they expected BBL's appointment to be novated to them at a later date (and hence expected to be able to bring a claim against BBL if necessary). This should strike a note of caution for contractors when preparing their tender, not to rely on a consultant's information simply because they anticipate the consultant's appointment being novated to them at a later date. For consultants who are asked to novate their appointments, it may mean a re-examination of the terms of their novations.