Novation: Wise precautions

Hands up those of you who can explain the difference between “assignment” and “novation” without hesitation or repetition?

Assignment is a unilateral act by which I can pass on to somebody else the benefits I enjoy under a contract with, for example, my architect or contractor. I don’t have to ask those parties for permission to assign my rights – unless, of course, the contracts require their consent.

A novation is completely different. Not only is it not a unilateral act, it is a contract – and a three-sided one at that. If contracts between two people are complicated, contracts between three people are even more so.

The practice of novating consultants’ contracts from developer to contractor in design-and-build contracts has, for a long time, been an everyday occurrence, but it still frequently causes confusion and conflict. Although the loudest complaints about the process have come from consultants – who are often exposed to serious conflicts of interest – the interests of contractors and clients need to be protected as well.

For example, the contractor wants a remedy if the consultant has been negligent in preparing the employer’s requirements, and that leads to an avoidable loss; the consultant needs to be clear about who is paying it for work on the cusp of the novation; and the client wants protection against negligent design after the novation if the contractor becomes insolvent.

In 15 August, page 48, Rupert Choat wrote about the recent case of Galliford Try vs Mott MacDonald, highlighting the issue of when duties of care are owed by consultants to contractors. The case is also a textbook illustration of the difficulties often posed by the novation process, particularly from the contractor’s point of view.

A design-and-build project had all along contemplated that Mott, which had originally been appointed by the developer to prepare employer’s requirements for structural and M&E services, would be novated to Galliford Try. But Mott’s appointment did not oblige it to enter into a novation agreement. In contrast, the design-and-build construction contract did say Galliford Try was obliged to sign a novation agreement with Mott and attached a draft deed for that purpose.

Mott worked as a subconsultant for Galliford Try, but negotiations to agree the terms of an acceptable novation agreement broke down. That meant there was never any contract between them.

The moral is, Don’t sign the building contract until novation agreements with the relevant consultants are ready and available for signature at the same time

During the works, problems arose with the structural design that necessitated some redesign, and Galliford Try incurred extra costs as a result. Galliford Try then sued Mott to recover those costs.

Not having the benefit of a contract with Mott, Galliford Try was left with only a potential remedy in negligence – a much more difficult claim to establish, and one that failed in the circumstances of this case.

One of Galliford Try’s arguments was that a traditional assignment clause in the original appointment, giving the developer the right to assign or transfer Mott’s appointment, imposed an obligation on Mott to enter into a novation agreement with the contractor. The judge disagreed. An assignment was quite different from a novation.

The moral from the contractor’s point of view is obvious. Ask at tender stage if the consultants are obliged to sign novation agreements in due course. Don’t sign the building contract until novation agreements with the relevant consultants are ready and available for signature at the same time. Check up also on the stage the design has reached so the contract is not signed on the mistaken assumption that it has reached a particular stage when in reality the programme has seriously slipped.

So what about that novation document? Where do you get hold of it? There must be hundreds of bespoke forms in use, all different, some putting consultants in impossible conflicts, some giving contractors insufficient protection and some neglectful of the client’s concerns.

In 2004, the Construction Industry Council produced a model form of novation. It is a fair and balanced document that tries to look after everybody’s interests. It ought to be more widely acknowledged and used than it is. It is accompanied by a separate warranty from the newly novated consultant in favour of its former client as to the adequacy of its post-novation services. Clients will frequently insist on such a warranty, so a complete package is available.

Would it not be sensible for lawyers acting for developers to familiarise themselves with these documents and promote their use, rather than flood the market with further bespoke forms?