Construction and Engineering Toolkit: Novation – August 2015

In This Issue:

Novation in construction and engineering projects

Novation is the cornerstone of design and build procurement. It is the novation of the design consultants’ appointments to the main building contractor that effects the risk transfer that developer employers seek. The novation must be executed properly; if this does not happen, the effect can be the loss of a party’s legal rights altogether.

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August 2015
Contractor (C)
Consultant (B)
Employer (A)
Employer (A)
Consultant (B)
Original contract New contract
Building contract
Building contract
02 | Novation Toolkit—August 2015
Novation is the icing on the cake when it comes to transferring the risk of the design and the construction of a project to a
single point of responsibility (namely, the main building contractor).
Typically, the developer appoints its design consultants (architect and engineers) under professional appointments and,
separately, engages its main contractor under a design and build construction contract.
At some point during the project (usually when the building contract is entered into, or where the design has reached a
certain stage) the developer novates its design consultants’ appointments to its main contractor. Sometimes, this may not
affect the whole design team; the mechanical and electrical engineer may remain appointed by the developer.
As the consent of all parties is required, the novation is effected by each party entering into a novation agreement. It is also
common for the developer to receive a separate collateral warranty back from each design consultant so that it can retain a
direct route of claim against each design consultant, if necessary.
Novation and assignment are separate and distinct legal concepts:
In Scotland, the position is slightly different. Assignment is termed “assignation” and, under Scots law, obligations can be
assigned (as well as rights) unless there is an element of delectus personae. Delectus personae means “choice of person”:
where a consultant is selected because he possesses a specific skill or particular expertise and/or experience, there will be an
element of delectus personae and it will not be possible to assign his obligations.
The terms of the novation are set out in a separate contract called the novation agreement or deed of novation. It is
important that the terms of the agreement are clear and unambiguous. The Scottish case of Blyth & Blyth v Carillion
Construction Limited (2001) demonstrated how issues with a novation agreement can result in difficulties over whether a
novation or an assignment was intended and may have quite unexpected and inadvertent consequences.
The employer appointed Blyth & Blyth as engineers and novated their appointment across to Carillion, the main contractor.
While still appointed by the employer, Blyth & Blyth underestimated the amount of steel reinforcement required in the
works. The underestimated figure was included as part of the bill of quantities in the contractor’s tender and subsequent
building contract. Following the novation, the contractor was unable to make a claim against the employer for its loss due to
the undervalue as it had accepted full responsibility for the design.

Novation Assignment
Novation transfers both the rights and obligations under a
contract to a new party
Assignment only enables a party to transfer the benefit of a
contract (the rights under that contract) to a new party; it is
not possible to assign contractual obligations (or “burdens”)
to another party
Novation requires the consent of all of the parties A contract may be assigned without consent (unless the
contract expressly requires it)
Novation creates a new contract in place of the original
Following an assignment, the original contract is not
extinguished; consequentially, the party assigning the benefit
of the contract remains liable under it | 03
The contractor sought to recover its loss under the novation agreement. The court, however, ruled this was not possible: the
novation agreement meant that Blyth & Blyth had agreed to perform future obligations for the building contractor but the
contractor could not claim losses arising from Blyth & Blyth’s breach of the appointment before it had been novated.
The wording of the novation agreement was to assign to Carillion any claim which was available to the employer for
services carried out pre-novation by Blyth & Blyth. However, it was decided that the employer had incurred “no loss” from
Blyth & Blyth’s breach, as Carillion had assumed all the risk under the building contract.
The result was that Carillion was left liable to the employer for problems caused by the pre-novation services (performed
by Blyth & Blyth) and Carillion had no effective remedy against the engineers.
The decision caused much concern. In response to Blyth & Blyth, industry organisations such as the Construction Industry
Council (“CIC”), the City of London Law Society (”CLLS”) and the British Property Federation (”BPF”) published their
own standard form novation agreements.
Each of these organisations approached the issues raised by Blyth & Blyth in a different way. As a result, two types of
novation agreement are now available to design and build contractors, the “switch” novation and the “ab initio” novation.
Whilst both are novation agreements, the legal effect of each is very different; the novation produced by the CIC and the
BPF is a “switch” type of contract, whilst the CLLS has produced an “ab initio” type agreement. If one is to be used, an
industry standard novation agreement must be reviewed and amended, as required.
The “switch” novation aims to reflect what happens in reality; it details the fact that the consultant began to work for the
employer at the outset of the project and then, from a certain stage of the works, worked for the contractor.
The legal effect of this type of novation is that the consultant remains liable to the employer for the work carried out prior
to being employed by the contractor. After the novation is entered into, the consultant becomes liable to the contractor for
all future services it performs.
By entering into the design and build contract with the developer, the contractor accepts responsibility for any design work
done by the consultant prior to the novation. For this reason, the contractor will require the consultant to enter into a
warranty for all services carried out prior to the novation, warranting that all services have been performed for the
developer in accordance with the terms of its appointment. This provides a safeguard to the contractor, as, if the consultant
breaches its duty to the developer, resulting in the contractor becoming liable for loss, then the contractor will have redress
against the consultant.
As a consequence of Blyth & Blyth Limited, the CIC agreement provides the following wording: “…Save that the
Consultant shall not be absolved from liability to the Contractor for such loss merely by virtue of the fact that the loss has
not been suffered by the Employer”.
This important caveat prevents the consultant from raising a ”no loss” argument that, as the developer suffered no loss, the
contractor is not entitled to recover from the consultant following the novation.
Ab initio can be translated as “from the outset”. Unlike the switch novation, this type of novation creates the fictional
scenario that the consultant has always worked for the contractor from the very outset of the project.
The ab initio agreement is based on the traditional type of novation whereby the original employer transfers all its rights
and obligations to another employer who steps into the shoes of the original employer. From the moment the novation is
effected, the second employer is treated as if he had always been the employer. A new contract, on identical terms to the
original contract, is entered into between the second employer and the consultant.
Based on this traditional type of novation, it has become common practice for the consultant’s appointment to be novated
from the developer to the contractor at a particular stage of the works.

04 | Novation Toolkit—August 2015
The legal effect of this type of novation is that all obligations owed, performed or discharged by the consultant to the
developer before the novation are transferred to the contractor. Accordingly, if a problem with any pre-novation work
arises, the contractor will be able to pursue the consultants as he can rely on the fictional scenario that he has always been
in contract with the consultant.
The CLLS standard novation is based on the ab initio form. It clarifies that the consultant is liable for losses suffered as a
result of the consultant’s breach of the appointment before the novation took place.
In relation to the professional services each design consultant should perform and for whom, it is fundamentally important
to consider what happens post-novation. In some situations, certain obligations may need to continue and be owed directly
to the original employer. This needs to be considered carefully and dealt with on a case by case basis. For example, in
relation to each design consultant, it may be that there is a demarcation between pre- and post-novation services.
Novation is not limited to design and build procurement. A novation provision may be included in construction and
engineering contracts on the basis that, even if novation is not planned for, an express novation clause may prove useful.
By way of example, the novation clause could specify that novation by the employer and/or contractor is permitted to
another company within the same group of companies. It may be that novation is required from one contractor to another.
In any event, it is prudent to have the parties’ prior agreement to novation via an express clause, should circumstances arise
during the project where novation is required.
■ To effect a novation, a formal written novation agreement needs to be executed.
■ Where the original contract (building contract, professional appointment) has been executed as a deed, a deed of
novation should be entered into between all three parties.
■ The terms of the novation must be clear and unambiguous in order that it is not mistaken for an assignment. A failed
novation could lead to a deemed assignment whereby the assignor would still be liable under the original contract.
■ Ideally, the form of novation agreement or deed of novation should be appended to the underlying contract to create
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