What is novation?

Gateley Legal

In a recent blog post we discussed top tips for assignment of reports and touched on novations if the burden (for example the obligations for payment) is to be transferred. So what is novation?

Although novation has the effect of transferring obligations, the traditional view is that a novation is an agreement that replaces the original contract with another one on the same terms but with different parties.

The most common use of novation in construction projects is on design and build projects when the design team are ‘novated’ to the contractor.  The effect of the novation is that, at the time of entering the novation agreement (which is usually when the building contract is signed), the employer under the consultant’s appointment is replaced by the contractor and the contractor steps into the shoes of the employer as if it had always been the employer from the outset.

The usual approach is to enter into a tripartite agreement between the employer, consultant and contractor as consent from all parties is required for novation.  This is a key difference between novation and assignment as, subject to the wording of an assignment clause, consent is not required for an assignment of rights.

It is always best practice to make it clear at the beginning of a project that novation is anticipated and to ensure that the consultant’s appointments and the building contract includes the agreed forms of novation agreement.

Even if no novation is planned at the time of negotiating a consultants’ appointment, consideration should be given to whether this may be a possibility and wording should be inserted to allow for novation in future.  In both circumstances, the services to be rendered by the consultant during the construction phase should be carefully reviewed to avoid creating any conflicts.

The form of novation agreement should be reviewed to ensure that clear and unambiguous wording is used to deal with the parties intentions on releasing the ‘employer’ and the ‘consultant’ and creating the new rights between the ‘consultant’ and the ‘contractor’.

Although, novation agreements normally provide that the same terms will apply to the new parties, amendments can be inserted into the novation agreement which will vary the existing terms.

An important provision in the novation of professional consultants in the construction industry is the right for the new employer to recover losses post novation from a pre novation breach even if the old employer might not have suffered that loss.  This is commonly known as “Blyth & Blyth” wording after a Scottish case*.

Due to the specific nature of novation agreements, if you are entering one, we suggest that you take some legal advice. They can be tricky after all!

*Blyth & Blyth Limited v Carillion Construction Limited

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