New standard deeds of novation - a step forward

The recent publication of two new standard deeds of novation has led to much confusion in how to deal with novation in the construction industry.

We have recently seen the publication of two new standard deeds of novation – one produced by the City of London Law Society (CLLS) and the other produced by the Construction Industry Council (CIC). These standard forms have largely been created in response to the decision in Blyth & Blyth Ltd v Carillion Construction Ltd (2001) 79 Con LR 142 (Outer House, Court of Sessions)

In strict legal terms novation is where one contract is discharged and a new contract is entered into in its place. In the construction industry, the term "novation" is generally used to refer to the use of the same form of contract (i.e. the consultant's appointment) with a change of parties i.e. the employer is replaced by the contractor. Deeds of novation are used in design and build projects to allow the contractor to step into the shoes of the employer in relation to any consultants employed on the project by the employer in the initial stages. The advantage of novating consultants to the contractor is that it still allows employers to have full control over design in the initial stages, but ultimately gives the employer single point responsibility for the final design for the final design in the form of the contractor.

Before we go any further in looking at the two new forms, it may be beneficial to have a quick reminder of the Blyth & Blyth decision. The case involved a design and build project in which Blyth & Blyth (the consultant) was novated to Carillion (the contractor). At the end of the project Blyth & Blyth sued Carillion for fees and Carillion counterclaimed for damages for breach of contract. These breaches related to services performed pre-novation, The Judge decided that Carillion was not entitled to recover its losses from Blyth & Blyth.

This judgment was based on the fact that the Judge decided that the damages Carillon was entitled to should be limited by the extent to which the employer would have been able to recover due to the breaches. As the employer would have only been able to recover minimal losses, Carillion was not able to recover the considerable losses that it claimed it had suffered. The Judge believed (and the parties agreed) that due to defective drafting the novation agreement took effect as an assignment of the employer's rights and did not create a new set of duties. As with all assignments the contractor was therefore only able to recover his losses to the extent that the original party to the appointment (the employer) would have suffered such losses to pursue claims that were available to the employer pre-novation. Understandably this decision has led to contractors being wary of the wording of novation agreements, as they want to make sure that they are able to claim their own losses against consultants for pre-novation breaches.

It is a fine balancing act to protect the concerns of contractors and to find wording that consultants are happy with. It is these conflicting views that the two new forms have attempted to reconcile, as well as taking on board the issues highlighted in the Blyth & Blyth case. They have both come up with different ways of dealing with these issues. The CLLS form envisages a novation ab initio i.e. that the contractor is treated as if it had been a party to the appointment in place of the employer from the beginning. The CIC form's approach is not a novation at all but an assignment (as per Blyth & Blyth) but with a warranty by the consultant to the contractor in respect of the pre-novation services. However, contractors need to exercise caution as on a literal reading of the warranty to the contractor, the consultant might be able to avoid liability as per Blyth & Blyth if the loss incurred by the contractor was in part similar to the loss that would have been incurred by the employer in relation to a pre-novation breach.

Before looking at the forms in more detail it is worth noting that there are some similarities in their approaches:

• Both forms are short and straightforward, with no more than five clauses.
• Neither has included warranties back to the employer or step-in rights; it is suggested that these should be dealt with in a separate document (more on that later).

The guidance notes of the CLLS form announce it as "a simple document which is adaptable for use in respect of a variety of different contexts and with the various forms of standard form and bespoke consultancy agreements which exist in the marketplace". It certainly is a simple document, with only 3 clauses. The first clause deals with the novation itself and the second and third with jurisdiction and rights of third parties respectively.

The agreement first of all releases the consultant from any obligations owed to the employer and then moves on to deal with the novation ab initio (so that the consultant undertakes to perform the services as if the contractor had been a party to the appointment from the start). There is also a provision which releases

the employer from any obligations to the consultant. Practical matters such as payment by the employer is dealt with by a warranty from the consultant that all fees have been paid up to the date of the novation. The CLLS approach to damages is that the consultant's liability for the contractor's losses is limited by any limits on liability in the appointment. However, it does circumvent Blyth & Blyth by including the proviso that this is "notwithstanding that such loss or damage would not have been suffered or incurred by the Employer (or suffered or incurred to the same extent by the Employer)".

As stated above, the CLLS form does not include a warranty back to the employer. The guidance notes cite the Blyth & Blyth case, in which doubt was cast on the effectiveness of the novation agreement, because it contained a warranty back to the employer. They have also not included "step-in" rights i.e. where the employer regains its rights to instruct the consultant in the appointment where the building contract is terminated (for instance on the insolvency of the contractor). As with the warranty back to the employer, the CLLS felt that it retained clarity by keeping these extra provisions separate. Again the guidance notes cite the Blyth & Blyth case in which the Judge considered that the inclusion of these type of rights was inconsistent with normal legal concepts of novation.

In this regard the CIC form takes a similar approach. Their guidance notes suggest the use of a separate warranty back to the employer which they have specifically created for use with their standard novation agreement.

Under the CIC form the consultant is not absolutely released from its obligations to the employer. The appointment envisages the retention of the consultant's obligations to provide warranties and to maintain confidentiality. The CLLS form prefers a clean break, however, with novation marking the separation of the consultant's appointment by the employer from the consultant's appointment by the contractor. Another difference in this form is the inclusion of a schedule which should refer to any services which need to be altered to reflect that after novation the contractor has taken the place of the employer. There is another schedule to deal with variations of the contractor's obligations.

The CLLS form also recognises that this can be an issue, but they have drafted their form on the basis that the services in the consultant's appointment have been carefully considered in advance so as to remove any which may be inconsistent with the contractor taking the place of the employer after novation. Again this was highlighted as an issue in Blyth & Blyth. Carillion had tried to argue that it should be substituted in place of the "employer with regard to all the pre-novation services. However, some of these would not have made sense if the word "employer" was simply replaced by the word "contractor" (for instance in relation to services in assisting the employer to appoint a contractor). On this basis, if a consultant is appointed on a project with traditional procurement in mind, which is later changed to design and build, the services would have to be very carefully checked when using the CLLS form. However if novation has been agreed from the outset, it will be much clearer to ensure that the services are appropriate from the beginning, as the CLLS form envisages.

These two forms come a long way towards solving the issues raised by the Blyth & Blyth case. They are simple to use and come with helpful guidance notes. However, opinions on how to deal with Blyth & Blyth are obviously wide and varied (as the standard forms take two different approaches). Many bespoke novation agreements will deal with these issues differently also. Some will deal with the Blyth & Blyth issues by simply including a warranty from the consultant to the contractor that it has performed all of its duties and obligations under the appointment prior to the date of novation coupled with an acknowledgment from the consultant that it will perform the appointment as if the contractor were, and always had been, a party to the appointment in place of the employer. Some will also still contain the warranty back to the employer and "step-in" rights; others like the standard forms will put them into separate agreements. Therefore it is still very much a matter of finding the common ground between consultants and contractors and making sure that there is sufficient provision to guard against the Blyth & Blyth decision. Unfortunately these issues are unlikely to be conclusively resolved until they have been brought before the courts once more and different approaches to dealing with them will continue to be used. In the meantime, the two new forms are certainly a great help in what has become a somewhat confusing aspect of construction contracts.

For further information please contact Gemma Hunter on +44 (0)20 7367 2887 or at [email protected]