Novation Case Study no.1

A contractual muddle

Griffiths & Armour
20 September 2014

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Perhaps the most ‘basic’ form of contractual problem is the absence of a contract in the first place. This occurs all too frequently and we have dealt with the problem associated with the absence of a contract many times.

Perhaps the classic example relates to a design and build project in the East Midlands, relating to a large commercial development. In the normal way, the employer engaged the design team who produced scheme designs and employer’s requirements. The tender went out and a contractor was selected to build the project. Novation of the design team to the contractor was always intended and discussions regarding a suitable agreement took place over a period of months.

A contractual “black hole” is a perfect breeding ground for claims to develop, even in the absence of the added complication of a proposed novation. 

However, the novation agreement was never formally agreed by the parties. 

A contractual “black hole” is a perfect breeding ground for claims to develop, even in the absence of the added complication of a proposed novation. With no novation formally agreed, it was open to both the employer and contractor to argue that the design team was working for them. In this case, the situation might have been managed better had the parties consistently acted as if the novation had taken place, as a court might be persuaded to infer that, if the novation was intended and the parties had acted as if it were intended, then this should be the basis of the contract between them. 

Unfortunately, whilst the design team behaved in part as if they were working for the contractor, they continued to invoice the original employer directly who, in turn, continued to pay these fees directly to them. The project ran into difficulties and became severely delayed and well over budget.

With a confused contractual framework between the parties, it is proving difficult to defend allegations from both employer and contractor that the appropriate advice was not provided to each party by the design team. The result is a very complex claim, which is proving difficult and costly to manage. The cost to the consultants’ professional indemnity insurers of determining the contractual position alone will be considerable. 

Outcome

In reality, this kind of contractual lacuna could happen in virtually any situation, not just where a novation is envisaged.

The problem in having a black hole where the contract should be is, however, exacerbated many times over as there is a triangle of conflicting interests at play rather than the traditional two.

This not only increases the potential for problems to develop, as there are now three parties in dispute, but the over-arching commercial relationship is often between client and contractor, which can lead to the consultant being frozen out of key meetings, often to his detriment.