Baffled by legal jargon? Don’t know ab initio novation from non-binding mediation? Luckily, we can tell you all about it. This week: M and N

M is for mediation

Although mediation has been around for centuries in one form or another, its use in settling construction disputes is comparatively recent. Lord Woolf’s report, Access to Justice, led to the publication of the Civil Procedure Rules (CPR) in 1999, which overhauled the way that disputes were handled in the courts.

The CPR made it clear that parties and their lawyers would have to explore means of settling disputes other than through the courts. Since 2000 the rules have included a pre-action protocol designed to help that early settlement. Now, in most disputes in court, parties will have to show that they explored another means of resolving the dispute or that there were good reasons not to do so.

Mediation is an increasingly popular means of resolving disputes and now appears as a contractual option in a number of contracts. In its simplest form it is little more than one line saying that the parties may refer disputes to mediation, but some clauses set the process out in great detail.

Lawyers and other professionals often act as mediators. Their role is not to reach a decision or make a finding as to the rights and wrongs of the dispute, but to help the parties to reach a settlement. A mediation will typically take place in the course of one day (depending on the size of the dispute) and although the format will be set out by the mediator, it usually involves some sessions in which both parties are present with the mediator and others where the mediator speaks to each party in turn. This allows the mediator the opportunity to offer candid views on the strengths and weaknesses of a party’s position - and this may be the first time the parties can appreciate the implications and risks of taking the dispute to court.

Mediation is not cheap (the costs of the mediation will include that of the mediator, the parties’ lawyers and the venue for the mediation), but it’s likely to be much cheaper than full litigation. Of course, not all mediations reach an agreement on the day, but even those that don’t are likely to make the parties focus on a settlement before trial. If the parties do settle their dispute, they can set it out in an agreement they sign at the end of the mediation that becomes binding.

N is for novation

When construction works are carried out on a design-and-build basis, the issue of novation nearly always arises. It happens when the design team is initially engaged by the employer to prepare its requirements, but is then transferred to the contractor. The transfer is done by a deed of novation, which ends the contract between the employer and the designer and creates a new contract between the designer and the contractor. Because the original contract between the employer and designer is ended by the novation, it is usually replaced by a collateral warranty, so there is a direct contractual link between the employer and the designer.

By using the novation process, the employer intends to have an input into the original design, but to pass responsibility for that design to the contractor, on the basis that the designer becomes responsible to the contractor for any defects in the original design. Arguably, this position was broadly accepted by those taking part in the novation process until the case of Blyth & Blyth vs Carillion in 2001 in which the court held that the designer was only liable to the contractor for the same losses caused by defects in the original design for which it was also responsible to the employer. As the employer suffered no losses (because they were all borne by the contractor in its contract with the employer) the contractor could not recover from the designer. 

This case has led to a number of different approaches to novation. One is “ab initio” novation, which operates on the premise that the designer has always worked for the contractor. Another is switch novation, which operates so that the designer is responsible to the employer for the design it carries out before novation and to the contractor for the design it carries out after novation.

Contractors will accept ab initio novations as they have a direct remedy for defects in the original design, but will be reluctant to accept switch novations unless they also have a warranty from the designer for the original design.  

Sometimes employers will look to designers to perform services for them after the novation has taken place and this can be dealt with in the novation or by way of a new appointment that is separate from the novation.

Michael Conroy Harris is a senior legal manager at Eversheds