HENRY HATHAWAY outlines the principle behind a Deed of Novation and suggests that when it comes to projects where design obligations are being transferred to the contractor, the appropriate instrument must be implemented.
A usual feature of construction projects is a scenario where the employing party will undertake designs and then generate the specifications for a project with the consultant team prior to engaging with contractors for tendering.
Generally, the consultant team will set out the performance specifications and take the design to a developed stage according to its agreement. Contractors will then tender on the designs and specifications that have been produced. Where the contractor is to take responsibility for further design or implementation, it then has a choice, it may employ its own design teams directly, or it may decide, usually through agreement with the employer, that it will retain the original design team given the fact that there is a familiarity with the scheme or that it is convenient to carry through with the designs that are in development.
Deed of Novation
One particular way to facilitate this mechanism is to proceed with a ‘Deed of Novation’. Essentially, a novation is the transfer of all obligations under one agreement between two initial parties (employer and consultant) to an incoming party (the contractor) and allows for the designs to continue. The incoming party takes the place of the original party, usually the employer, and so the process of design development continues, hopefully seamlessly.
A question then arises. If a contractor that had based its entire tender pricing on the designs and specifications by the consultant when it was retained during the time with the employer later finds out that the design was wrong or perhaps negligently performed, then what can the contractor do about this scenario?
To explain further, a contractor who costed its tender against drawings and specifications that were either not developed correctly or are unworkable might turn to the employer and set out that the contractor merely followed the designs and specifications at the time of tendering and relied upon the information that was provided at the time but later found to be wrong.
Design & Build Contracts
This is a scenario that was evident in the Scottish case of ‘Blyth & Blyth Limited v Carillion Construction Limited’ in 2001. Carillion was the design and build contractor and agreed to enter into a novation agreement of the engineer’s appointment that was originally with the employer. Carillion subsequently found that the tender drawings were wrongly prepared for the employer prior to the novation. If Carillion were to return to the employer, the employer would certainly have stated that it no longer was a contracting party with the engineer and that redress should be direct from the consultant. Carillion then pursued Blyth & Blyth, the engineer and stated that the engineer had underestimated the scope and quantity of work and suffered loss, having caused Carillion to undervalue the works. Carillion relied on broad wording of the novation, but the court found that the wording was insufficient to give Carillion a right to pursue for losses pre-novation. It found that no greater loss had been suffered by Carillion than the employer, and given the fact that the employer had not, in fact, suffered any loss (it was released from the contract and arguably was in benefit because Carillion had under-priced the works), then no greater loss could be claimed by Carillion above what the employer had suffered. It is known as the no-loss principle.
If the above sounds difficult, it is because it was a difficult position. It emerged to be a “black hole” but essentially derives from loss.
In my previous articles and lectures, I will have spoken about a claim requiring a coincidence of breach and loss with the required factual and legal causation.
Organising the transfer of obligations
Since this case, the remedy was in drafting and organising the transfer of obligations. There are, in essence, two types of novation generally accepted, ab-initio, where an imaginary scenario is provided that the incoming party was always the contracting party or a switch agreement. The above scenario in Blyth & Blyth is catered for through a “no loss clause” in drafting.
The key takeaway is to ensure that the appropriate instrument is implemented where obligations are, in effect, being transferred.
However, pragmatically, many other issues arise for all of the parties, be they consultants, employers or contractors and need to be considered.
In the first instance, where there is a transfer, and the contractor has relied upon the developed design to that point in order to provide a cost, it ought to be identifiable to what extent the design has been progressed to and whether the employer’s requirements can be adequately met.
Scope of the original services
A further point arises as to payment and to consider what scope of the original services have been undertaken by the consultant, whether payments are up to date and what scope of services are required to be completed. A consultant can find itself in difficulty when an incoming contractor may seek to value engineer or make changes, and the consultant must be alive to this in terms of its own previous work and whether or not adequate sums have been allowed for to carry out any further designs.
At the outset of any such agreement, a developed set of schedules are required to be incorporated, which set out the performed scope and detailed costs as well as prospective work and fees along with the programme development. Any deviations or methods to be proposed by the contractor at this point should be contained within its proposals and the underlying construction contract.
Given the complexity of the case in Blyth & Blyth and the theories related to the underlying problems that can arise, it is best advised to stay clear of such arguments. The case of Blyth & Blyth is examined and discussed in detail in training and development courses offered by Henry Hathaway Solicitors and pragmatic steps provided to assist in avoiding the circumstances that can arise.
Henry Hathaway is a solicitor who practices in both Ireland and England and Wales and specialises in construction law. He is a qualified civil engineer and spent 12 years working in the industry. He regularly advises on contract formation and provides practical advice when entering construction contracts and regularly provides training and seminar days to companies to assist knowledge and application in order to assist them in avoiding disputes in construction.
If you require further information in relation to contract formation or would like to discuss training and development in this area, contact firstname.lastname@example.org
This is one in a series of articles by Henry Hathaway for Irish Construction News, Click Here to read other articles
Disclaimer: This content is provided for information purposes only and does not constitute legal advice. It is provided to present information to the broader construction industry and provide awareness. Independent legal advice should always be sought prior to application, and no solicitor/client relationship is formed, and no duty of care nor liability arises from any of the contents of this article.