Design and build contracts often provide for the novation of appointments of the various design consultants from the employer to the contractor.
This is effected by a contract between the employer, the consultant and the contractor under which the contractor becomes the new employer of the consultant. There must have been an appointment by the employer of the consultant in the first place, and that appointment must require the consultant to enter into a novation agreement to accept the contractor as his new employer. Similarly, the building contract must require the contractor to enter into the novation agreement to take on the role of the employer of the consultant.
The appointment continues - the contractor as the new employer has the contractual rights under the appointment to the performance of the services, and the consultant has the right to look to the contractor for payment of the fees payable under the appointment.
The old employer no longer has any rights to the service of the consultant, and no liability for the fees.
As the novated consultant no longer owes any duty of care to his former employer, the novation agreement usually provides for the consultant by executing a warranty to continue owing to the former employer a duty of care.
So, the original employer’s interests are protected – he no longer has to pay the fees, the contractor has taken on his chosen consultant, and that consultant owes him a duty of care.
What about the consultant? He now has a new employer, one that he did not contract within the first place. The consultant may have concerns about payment and possible conflicts of interest as between his former and present employers.
And the contractor? He has to take on a consultant on terms as to fees and for services he has not negotiated.
Still, it’s a small world, and the parties might have worked together successfully on projects before, this overcoming any initial concerns.
Problems do of course arise from time to time. For example, in Blyth & Blyth Limited v Carillion Construction Limited , the contractor found himself unable to claim against a novated engineer in respect of an under-estimate in the amount of bar reinforcement prepared by the engineer prior to novation because the loss was not suffered by the original employer to whom the duty of care at that time was owed. Often this is now dealt with by the addition of a clause preventing the consultant raising the “no-loss argument”.
A more basic problem arose in Galliford Try Infrastructure Limited v Mott Macdonald Limited – that of actually getting the documents executed. The parties contemplated that a novation agreement would be entered into by the engineer. The design and build contract required it, but the engineer’s appointment did not. Despite negotiations over terms, no novation agreement was entered into. Without it there was no contractual relationship between the engineer and the contractor. When the contractor suffered losses in respect of extra costs following a substantial redesign by the engineer, it sought to rely on negligence, claiming a duty of care arising by virtue of a “special relationship” existing between them, but it failed to establish the existence of this duty.
So, what should the parties look out for?
The contractor – that the tender documentation shows the appointments and the obligations on the various parties to enter into novation agreements
The employer – that he gets warranties back from the novated consultants
The consultant – whether there are any potential conflicts
All parties – that all the documents contemplated are actually executed
For more information or advice on novation agreements, please contact
Peter Tugwell.
