Novation: Let's innovate

Novation is much beloved by clients who want a genuine “fixed price” contract. It allows clients to secure planning permission and design the building they require to whatever level of detail they choose and then transfer the risk of errors or discrepancies in that design to the contractor. In exchange, of course, the contractor inherits the client’s rights against the designers by taking novation of the consultancy agreements.

The difficulty for the client is that, having novated his design team, he has no consultants to support him going forward on the project, except his cost consultant. But in order to take the project forward, the client needs more than just cost advice. He needs advice on the detailed design being produced by the contractor - does it comply with the requirements or proposals under the building contract? Does it comply with the statutory requirements? He needs advice on the quality of workmanship and materials on site - again, do they comply with the building contract? He needs someone to issue interim payment certificates and practical completion certificates and to grant extensions of time.

In any litigation primary liability will always lie with the contractor, so what was the point of all the paperwork?

This is all a bit beyond the average cost consultant. So to whom does the client turn?

Monitoring team

On the biggest projects, some sort of independent monitoring team is probably essential. This may not comprise a full set of consultants in each of the relevant disciplines - an architect, a commissioning engineer and a resident “clerk of works” may be sufficient. The problems with a separate monitoring team are obvious, though: there will be a tendency to “second guess” the novated design team, which will increase cost and has the potential to cause delay. The new team will not be as familiar with the project as the novated design team, and so on.

The Chinese Wall

On most projects, a practice has developed of separate appointments by the client with the same firms as have been novated to the contractor. These separate appointments usually involve separate personnel, often with a separate fee and incorporating the usual suite of collateral warranties/third party rights. The “Chinese Wall” between this new appointment and the novated team makes sure that the client’s interests are protected - but are they? The truth is that if, for example, the contractor is complaining about errors in the structural design by the novated team, no Chinese Wall will ensure that the client’s team tells the client about the problem. It would probably be a breach of the terms of the consultant’s professional indemnity insurance policy if it were to do so. So just when things go wrong and the client needs help from its consultants, the client’s new team lets it down. In any litigation primary liability will always lie with the contractor, so what was the point of all the paperwork?

Collateral warranties/third party rights from the novated design team

In theory, if the novated design team are providing services for the contractor, a collateral warranty or third party rights to the client, in relation to the proper performance of those services, should give the employer the protection it needs. But collateral warranties/third party rights always provide that the same defences are available to the consultant in the event of a claim by the client as would have been available to the consultant if the claim had been made against it by the contractor.

For example, if the consultant raises concerns with the contractor about the quality of particular workmanship, and the contractor tells him that his concerns
are misplaced, or ignores him, the consultant would have a defence if the contractor subsequently tried to sue him for negligence. The consultant would also have this defence if the client tried to sue for the same reason. So not much protection there either.

It is time the industry acknowledged that you cannot have your cake and eat it - you can’t novate a consultant and think that it can work in your best interests as well.

Might it not be better to foster instead a culture of openness and honesty about concerns so that the consultant - after novation - reports regularly to all parties
and problems are aired and solved together? This requires a different management style to that which generally characterises novated design and build procurement. It may not provide the comfort of theoretical legal remedies but it is more likely to solve problems on the ground.

Ann Minogue is a partner at law firm Ashurst