Emergency exit

John Stirling gave us a very erudite description of Blyth & Blyth vs Carillion Construction Limited (29 June, page 50). He concluded that engineers novated to contractors should give an indemnity to both contractor and employer in respect of errors in their design prior to the novation. This would clearly solve the legal conundrum, but contractual indemnities are anathema to most consultants and their insurers. So this is not likely to prove a practical solution to the Blyth difficulties.

What are those difficulties? In preparing its tender, the contractor relied on the design produced by the employer. As is more common than not, the design-and-build contract was amended from JCT81 to transfer to the contractor responsibility for the engineer's pre-tender design, and the contractor undertook to complete the project for a fixed price. After the ink was dry on the contract and novation, the contractor found an error in the design, incurred extra costs and sought to recover these from the engineer. It could not. The Court of Session found that:

• The effect of the novation was not simply to delete "the employer" from the engineer's appointment and substitute "the contractor". This would produce a nonsense in relation to the engineer's duties: the engineer would be required be advised the contractor on the merits of its own tender. So the novation was to be construed as simply allowing the contractor to pursue claims that were available to the employer pre-novation rather than creating a new set of duties. This aspect of the court's decision seems in principle correct.

• The court went on to say that, since the employer had suffered no loss as a result of the engineer's errors, it had nothing that it could pursue the engineer for and so the contractor could not recover either, as it was effectively taking only an "assignment" of the employer's rights. Accordingly, the engineer got off scot-free and the contractor's claims fell into the proverbial legal black hole.

It is this aspect of the decision that seems to be incorrect and which has surprised most lawyers. The wording of the novation was standard – the engineer was bound by the terms of its appointment "as if the contractor has always been named as a party to the appointment in place of the employer".

This is different wording from an assignment. The court seems to have set much store by the fact there was no express release by the employer of its rights against the engineer. But that does not seem to be relevant in the light of the wording quoted – "in place of the employer". Obviously the contractor could have checked the design using its own consultants but that would have meant additional costs and would defeat the objective of the novation. And the engineer would still escape scot-free.

Since the employer had suffered no loss as a result of the errors, the contractor could not recover either

So, how do we get round these difficulties? An alternative route to John's suggestion would be to draft the novation agreement so that it contains an acknowledgement by the consultant that the contractor has relied on its pre-contract design and a warranty from the engineer to the contractor that it has exercised reasonable skill and care in carrying out such design. That warranty should not be qualified by the usual wording about the contractor's rights under the warranty being subject to defences available under the appointment, otherwise the Blyth decision potentially bites again.

Another way might be to use the Contracts (Rights of Third Parties) Act 1999 and to give the contractor rights to enforce the appointment directly. The fact that its identity is not known at the date of the appointment is not fatal - the act allows the third party beneficiary to be identified "as a member of a class" (the contractor appointed to design and carry out the works). The contractor's rights would crystallise when the main contract is entered into.