Outstanding novation

Clients using design and build as the means of procuring their projects often intend that the professional team should be novated to the design and build contractor once the building contract is let. This may well have been discussed and agreed in principle with the consultants and the contractor at an early stage.

But uncertainties over the contractual position of the parties can arise if at some point in the project - usually during the tender stage - they start to act as if the novation has taken place when in fact no formal deed of novation or new appointment between the contractor and the consultant is ever entered into. The way this can happen is that the consultant stops acting for their original client and performs their remaining services for the contractor. The client stops paying the consultant and the contractor pays the consultant the remaining fee.

Novation is, in effect, the ending or extinguishing of the original contract with the client and the formation of a new contract whereby the contractor and the consultant agree to perform the outstanding obligations under the original contract for the other.

There is no reason in law why this new contract between the contractor and the consultant cannot be implied by or inferred from the conduct of the parties, as it is not necessary to have a formal written agreement for a contract to come into existence.

But without a formal novation agreement you can end up with problems in determining what the terms of that new contract are. There could also be confusion over whom the consultant is liable to for work already carried out and who is to pay the outstanding fees owed to the consultant.

To whom is the consultant to be liable if they have been negligent in the performance of the services for the client prior to ceasing to act for them?

In the absence of express terms (which could be in writing or oral), the terms inferred, or implied, in this new contract are likely to be restricted to basic matters such as the fee to be paid by the contractor and the services to be performed by the consultant for the contractor. In the event of a dispute the court may have regard to what is regularly agreed when this sort novation takes place and assume that what the parties intended, applying an objective test, was that the (probably numerous) terms of the original contract between the client and the consultant also applied to the new contract between the consultant and the contractor, subject to any necessary amendments and any expressly agreed variations. For example, the contractor and the consultant may agree to some changes to the original services that are now to be performed for the contractor.

Since the parties will have, in effect, agreed by their conduct that the consultant should now act for the design and build contractor under a new contract, it is likely that the courts will hold that the original contract has come to an end by mutual consent and the client and the consultant will be stopped from asserting that there are still outstanding obligations to be performed by the other. In a formal novation agreement, this is dealt with by the client and the consultant releasing and discharging the other from the further performance of obligations under the original contract.

What about any liability that has arisen out of the obligations already performed? For example, to whom is the consultant to be liable if they have been negligent in the performance of the services for the client prior to ceasing to act for them?

Normally this would be dealt with in a formal novation agreement. In its absence, the right to sue the consultant in respect of these matters would probably remain with the client. The contractor might try to argue that under the new contract the consultant’s liability should be that which arises under “ab initio” forms of novation agreement, under which the consultant’s liability for pre-novation breaches is determined on the basis of what the consultant should have done for the contractor had the contractor been the consultant’s client from the beginning of the project rather than the original client.

However, it is unlikely that a court would readily infer, without more evidence, that the consultant had agreed with the contractor to be liable to the contractor for breaches of the appointment with the client that occurred prior to novation or that the client had agreed to release and discharge the consultant from any such liability to the client.

As to the consultant, what would be the position if the original client still owed them fees? Again, it would probably be difficult to imply a term into the new contract that the contractor had become responsible for payment of outstanding fees due in the absence of evidence to the contrary and so the consultant’s right to sue the client for those outstanding fees would probably still exist.

Rachel Barnes is a partner in Beale & Co