Existential matters: Novation

Novation is a concept well known in construction circles, particularly since the rise of design-and-build contracts in which design professionals are transferred, or novated, to the contractor for the construction phase.

Such novations are achieved using a deed such those published by the Construction Industry Council and the City of London Law Society.

When novation becomes a factor in court, it tends to concern the effects of the novation liability – for example, the infamous Blyth & Blyth vs Carillion case in 2001 – not whether a novation has taken place at all.

That, however, was the issue in Camillin Denny Architects vs Adelaide Jones, which came before Mr Justice Akenhead in August. He was asked to enforce the decision of an adjudicator, who awarded fees to Camillin Denny.

Adelaide Jones had argued in the adjudication and on enforcement that it had no contract with Camillin Denny. In court it conceded there had been an original contract between them, but that it had later been novated.

A novation can occur without there being a formal deed to that effect. In the case of MSC Mediterranean Shipping Company vs Owners of the Tychy (No.2), the test Mr Justice Steele gave was: “Novation involved the creation of a new contract where an existing party was replaced by a new party and it required the consent of all the parties; such consent may be apparent from express words or inferred from conduct but the consent must clearly be established on the evidence as being consistent only with the intention of achieving a novation.”

One of Adelaide Jones’ arguments was that Camillin Denny had directed its invoices to a company called Euro Construction and this signified its consent to a novation. The judge did not find this persuasive – largely because Adelaide Jones had asked Camillion Denny to direct its invoices to this company, so it had done so.

The court found that although such a novation had been mooted, there was no evidence to support the contention it had actually taken place.

This is the first adjudication enforcement case involving a purported novation

Although issues as to who is the proper party to a contract have arisen before during the enforcement of adjudication decisions – an example being Thomas Frederic’s (Construction) vs Keith Wilson – this is the first adjudication enforcement involving a purported novation.

The test as to whether or not a novation has taken place (in the absence of a formal agreement) and a new contract created requires all the parties’ consent, apparent from expressed words or inferred from their conduct, and all evidence should only be consistent with a novation. In other words, if the evidence is capable of another explanation then a novation is deemed to not have taken place.

In a way, therefore, the criteria for an adjudicator when deciding whether a novation has taken place is more clear cut than some other decisions.

In the case of Air Design (Kent) vs Deerglen (Jersey), Mr Justice Akenhead’s decision appeared to suggest the scope of an adjudicator’s decision had been widened to encompass issues which might be characterised as jurisdictional.

Deerglen argued there were four separate contracts, and as such the adjudicator lacked jurisdiction. The judge stated the decision-making process upon which the adjudicator had to embark necessarily involved a consideration of whether there was more than one contract. It was thus within his jurisdiction to decide that there was one contract, albeit one that may have been varied by agreement.

On the face of it this appears close to what the adjudicator had to decide in the Camillin Denny case, yet Mr Justice Akenhead was not prepared to accept the argument that the issue had been settled by the adjudicator. He said: “I am not convinced this case is authority for any proposition other than that there may be cases in which adjudicators properly appointed have jurisdiction to resolve jurisdictional issues if and to the extent those issues are part of the substantive dispute referred to adjudication.”

It might have been thought that whether the original contract had been replaced by another might be something an adjudicator had the jurisdiction to decide, but clearly the judge felt that this was a step too far.