A new design-and-build agreement aims to simplify contractors’ rights of redress over design flaws that predate novation
A lot has been said and written about novation over the past year or so, much of it prompted by the Scottish judgment in Blyth & Blyth vs Carillion. If you recall, this found that a contractor was liable for mistakes made by an engineer before it was novated. In response to this, the City of London Law Society (CLLS) published a standard form of novation agreement and guidance note for use in design-and-build jobs. The main objective of this form is to give the parties what they want and to keep it simple.
In a design-and-build project, the contractor is required to take on the contractual risk of the design. This frequently applies even where the contractor has not done the design itself; rather, some of it may have been developed by the client’s consultants before the contractor was selected. In this situation the contractor is faced with having to accept a legal risk over which it has no control and no direct means of passing on to those primarily responsible.
This is where novation comes in. The client “novates” its design consultants to the contractor. The purpose of the novation is to provide the contractor with the necessary comfort that, if it is made liable for problems in the pre-contract design, it will have rights of redress against the client’s design consultants.
This is the focus of the CLLS form of novation agreement: to put the contractor in the position it would have been in if the consultants had been working directly for the contractor when it produced the pre-contract design.
To whom is the consultant responsible? The main problem highlighted in the Blyth case was that the contractor found itself liable to the client for problems in the pre-contract design, but had no effective remedy against the consultant that had carried out the work. The contractor was held to have received an assignment of the client’s rights against the consultant. The problem with this was that the contractor was limited to claiming the losses that the client could have recovered. In this case the client had not suffered any damage and the contractor was unable to recover anything.
In response to this, the CLLS standard form states that the contractor will be entitled to claim directly against the consultant any losses that
it has suffered. It is not limited to the losses of the client.
The other main form of novation agreement, published by the Construction Industry Council, takes a different approach. The CIC form leaves the consultant’s liability for pre-contract design with the client, and the contractor is simply offered a warranty from the consultant for the work it has performed for the client.
From the contractor’s perspective, the potential problem of this arrangement is that the consultant is expressly regarded as performing duties for the client, not the contractor. Coupled with this, the consultant is expressly entitled to assert all its defences and limitations of liability against the contractor that it would have been able to assert if it had been sued by the client. Against this, the CIC document includes a proviso that the consultant will be not be absolved simply because the client has not suffered any loss. However, it is open to question whether this proviso can adequately reverse the legal difficulties created by the fundamental point that the consultant’s pre-contract duties remain firmly owed to the client, not the contractor. In particular the scope of the proviso is questionable where the losses suffered by the client are different to (and less than) those suffered by the contractor, rather than simply non-existent.
By contrast, the CLLS form of agreement seeks to avoid the uncertainty for the contractor. The consultant is regarded as having always been employed by the contractor and as performing services for the benefit of the contractor. In the event of a problem for which the consultant is responsible, the contractor will be able to recover losses from the consultant. Keep it simple.
The Blyth case highlighted the dangers of overly-complex legal arrangements in novation. The CLLS novation agreement tries to step away from this. Appointment documents must also be kept simple, and ensure that all of the consultant’s duties can sensibly be carried out for the contractor after novation has taken place.
Paul Cowan is a senior associate with White & Case and Marc Hanson is a partner with CMS Cameron McKenna